BeyondFintech:APragmaticAssessmentOfDisruptivePotentialIn

FinancialServices
PartoftheFutureofFinancialServicesseries|PreparedincollaborationwithDeloitte

August2017
Foreword

ConsistentwiththeWorldEconomicForumsmissionofapplyingamultistakeholderapproachtoaddressissuesofglobalimpact,
creatingthisreportinvolvedextensiveoutreachanddialoguewithnumerousorganizationsandindividuals.TheyincludedtheForum's
FinancialServices,InnovationandTechnologycommunities,professionalsfromacademiaandthepublicsector.Theoutreachinvolved
over150interviewsand10internationalworkshopsessions,encouragingcollaborativedialoguetodiscussinsightsandopportunities
concerningfintechdisruptionwithinthefinancialservicesindustry.

Theholisticandglobalperspectiveofthisreportwouldnotbeasenrichedwithoutthesupportandcontributionsfromthesubjectmatter
expertswhoassistedindrivingourthoughtsforwardaboutthefutureofthefinancialservicesindustry.Inparticular,wethankthis
projectsSteeringCommitteeandWorkingGroup,introducedintheAcknowledgementssection,which playedaninvaluablerolewith
theirexpertiseandpatientmentorship.Alsocriticalhasbeentheongoinginstitutionalsupportforthisinitiativefromthe Forumandthe
leadershipofourchairman,whosevisionoftheFourthIndustrialRevolutionhasbeeninspirationaltothiswork.

Finally,wearegratefultoDeloitteConsultingLLPintheUnitedStates,anentitywithintheDeloitte1 network,foritsgenerous
commitmentandsupportinitscapacityastheofficialprofessionalservicesadvisertotheForumforthisproject.

Forfeedbackorquestions,contact:

R.JesseMcWaters WorldEconomicForum
jesse.mcwaters@weforum.org

RobGalaski Deloitte
rgalaski@deloitte.ca

1DeloittereferstooneormoreofDeloitteToucheTohmatsuLimited(aUKprivatecompanylimitedbyguarantee[DTTL]),itsnetworkofmemberfirmsandtheirrelatedentities.DTTLandeachofits
memberfirmsarelegallyseparateandindependententities.DTTL,alsoreferredtoasDeloitteGlobal,doesnotprovideservicestoclients.Pleaseseewww.deloitte.com/about foramoredetailed
descriptionofDTTLanditsmemberfirms.Pleaseseewww.deloitte.com/us/about foradetaileddescriptionofthelegalstructureofDeloitteLLPanditssubsidiaries.Certainservicesmaynotbeavailable
toattestclientsundertherulesandregulationsofpublicaccounting.
ThispublicationcontainsgeneralinformationonlyandDeloitteisnot,bymeansofthispublication,renderingaccounting,business,financial,investment,legal,tax orotherprofessionaladviceorservices.
Thispublicationisnotasubstituteforsuchprofessionaladviceorservices,norshoulditbeusedasabasisforanydecision oractionthatmayaffectyourbusiness.Beforemakinganydecisionortakingany
actionthatmayaffectyourbusiness,youshouldconsultaqualifiedprofessionaladviser.Deloitteshallnotberesponsiblefor anylosssustainedbyanypersonwhoreliesonthispublication.
2
MembersoftheSteeringCommittee

Thefollowingseniorleadersfromglobalfinancialinstitutionsprovidedguidance,oversightandthoughtleadershiptotheFutureofFinancialServices
seriesasitsSteeringCommittee:

RobertContri KimberlyHammonds AnjuPatwardhan

GlobalFinancialServices Leader, GlobalChiefOperatingOfficerandChief SeniorPartner,

Deloitte InformationOfficer,DeutscheBank CreditEaseFintechFund

AnnCairns JasonHarris DavidPuth

President,InternationalMarkets, ChiefExecutive, InternationalProperty ChiefExecutiveOfficer,

Mastercard andCasualty,XLCatlin CLSBankInternational

David Craig MichaelHarte WilliamSheedy

President,FinancialandRisk, GroupHeadofInnovation, Global Executive,CorporateStrategy,

ThomsonReuters Barclays M&A,GovernmentRelations,Visa

JohnFlint Axel Lehmann Dieter Wemmer

ChiefExecutive,RetailBankingandWealth GroupChiefOperatingOfficerandMember ChiefFinancialOfficer,

Management,HSBC oftheGroupExecutiveBoard,UBS Allianz

3
MembersoftheWorkingGroup

Theprojectteamwouldalsoliketoacknowledgethefollowingexecutivesofglobalfinancialinstitutionswhohelpeddefinetheprojectframeworkand
shapestrategicanalysesasitsWorkingGroup:

Josh Bottomley LenaMassCresnik,PhD BobReany

Global Head,Digital, BlackRock EVP,IdentitySolutionsProduct,
HSBCBank Mastercard

ThomasBrown VictorMatarranz PeterRutland

Partner, SeniorExecutiveVicePresident,Strategy,and PartnerandGlobalCoHead,Financial

PaulHastings ExecutiveChairmansOffice,Santander Services,CVCCapitalPartners

Claire Calmjane NeilMumm Nicolas deSkowronski

Director,Innovation, VicePresident,CorporateStrategy, DeputyHead,InvestmentSolutionGroup,

LloydsBankingGroup Visa BankJuliusBaer

ChristofEdel MaxNeukirchen Huw VanSteenis

GlobalHead,StrategyandBusiness ManagingDirectorandHead,Strategy, GlobalHead,Strategy,

Development,Financial,ThomsonReuters JPMorganChase Schroders

Roland Fejfar RobertPalatnick ColinTeichholtz

VicePresident,FinTechIBD, ManagingDirectorandChiefTechnology PartnerandPortfolioManager,

MorganStanley Architect,DTCC PineRiverCapitalManagement

RobGalaski(ProjectAdviser) JustinPinkham FabianVandenreydt

AmericasFinancialServicesLeader, SVPandGroupHead,PaymentsInnovation, GlobalHead,SecuritiesMarkets,Innotribe&

Deloitte Mastercard theSWIFTInstitute,SWIFT

DorothyHillenius JPRangaswami
Director,CorporateStrategy, ChiefDataOfficer,
ING Bank DeutscheBank

4
EditorsNote

TheDisruptiveInnovationinFinancialServicesprojectwaslaunchedattheWorldEconomicForumAnnualMeeting2014inDavos
Klosters, inaworldstillconsumedwithnavigatingtheaftershocksoftheglobalfinancialcrisis.Butinthewings,anewchallengefor the
financialsystemwasgrowingintheformoffintech newentrantsthatpromisedtorapidlyreshapehowfinancialproductswere
structured,provisionedandconsumed.

Nearlyfouryearslater,asthisinitiativedrawstoaclose,wetaketheopportunitytoreflectonthechangestothefinancial system
takingstockoftheimpactsthatfintechshavehadandconsideringtheirevolvingrelationshipswithbothincumbentsandregulators.
Moreimportantly,itpresentsanopportunitytoconsiderwhatliesbeyondthehorizonforfinancialservices.Thetechnologiesofthe
FourthIndustrialRevolutionhavetriggeredaseismicshiftinthefinancialsystem,theimplicationsofwhichwillextendfarbeyondthe
fintechsthatpioneeredtheiruseinfinancialservices.Valuechainsthathavecharacterizedtheindustryfordecadesarebeing disrupted
andreshapedwithimplicationsforcustomers,regulators,incumbentsandeveryotherstakeholderinthefinancialsystem.

InthisfourthreportoftheFutureofFinancialServicesseries,wehopetobuilduponourpreviousworkandprovidethemany
stakeholdersofthefinancialsystemwithabetterunderstandingoftheforcestransformingfinancialservices,aswellasan outlookforits
future.

R.JesseMcWaters RobGalaski
ProjectLead,DisruptiveInnovationinFinancialServices AmericasFinancialServicesLeader
WorldEconomicForum Deloitte

5
Contents

1.ContextandApproach..... 7
2.KeyFindingsandUncertainties... 11
3.Sector DeepDives
3.1Payments.. 35
3.2Insurance.. 59
3.3DigitalBanking.. 84
3.4Lending 105
3.5InvestmentManagement.. 126
3.6EquityCrowdfunding 147
3.7MarketInfrastructure.. 168
Acknowledgements.. 189
ContactDetails............................................................................................................................................................................................ 195

6
 Section1
ContextandApproach

WORLDECONOMICFORUM|2017 7
 CONTEXTANDAPPROACH|PASTREPORTS

Thisreportrepresentstheculminationofthreephasesofresearchintothe
transformativeroleoffintechsonthefinancialservicesecosystem
SinceDecember2014,theWorldEconomicForumhasstrivedtounderstandtheimpactofinnovationsonthefinancialservices
ecosystem,andtodeterminehowallstakeholderswouldbeaffected

PHASE1

Phase1laidoutafoundationforunderstandingthetransformativepotentialofnew
entrantsandinnovationsonbusinessmodelsinfinancialservices.Itfocusedon:
Establishing a clear taxonomy for understanding whichfintech innovations are
the most relevant
Mapping possiblefutures for the evolutionary paths of emergingfintech innovations
Exploring the implications of fintech on key stakeholders(consumers, incumbents,
regulators, etc.)
Phase1 outcomesare captured in thereport,The Future ofFinancial Services

PHASE2
Phase2 aimedtoillustratethe roleof financialinfrastructure in enabling thefuture of
financial services.Itfocusedon:
Understandingthetransformativepowerofblockchainonshapingthefuture
capabilitiesandcharacteristicsoffinancialinfrastructure
Definingahighlevelblueprintforfullydigitalidentityprotocols that
simultaneously empowers users, andsimplifiesandderisks identity transactions
Phase2 culminated in the release of two reports, Thefutureoffinancial
infrastructure and A Blueprint for DigitalIdentity

WhatisaFintech?Inthisdocumentwedefineafintechtobeasmall,technologyenabled,newentranttofinancialservices.Thisdefinitiondoesnotinclude
largetechnologyfirmsthatenterfinancialservices(e.g.ApplewithApplePay),orincumbentfinancialinstitutionswhoincreasetheirfocusontechnology

Context&Approach KeyFindings KeyUncertainties 8

 CONTEXTANDAPPROACH|CURRENTREPORTCONTEXT

Thefinalphasereturnstothestructureofthe2015report,conductingabroad
explorationoftheforcesreshapingthefinancialservicesecosystem
Thisreportbuildsontheworkofthepreviousreports,exploringtheforcesreshapingthestructureofthefinancialsystem. It also
considersevolutionarypathsforthefutureofthesystem,aswellastheirimplicationsforstakeholders

REPORTQUESTIONS

Whataretheinnovationsthathavemadethemost
1 impactonthefinancialecosystemsincethe2015
report,andwhataretheideasthathavefailedto B2B

produceimpact? Partnerships

Emerging
Howwilltheseinnovationsimpactthewaysinwhich Ecosystems

2 financialservicesarestructured,provisionedand
consumedinthefuture?

Whatwillbetheimplicationsoftheseinnovationson
3
thebroaderfinancialsystem?

9
Context&Approach KeyFindings KeyUncertainties 9
 CONTEXTANDAPPROACH|PROJECTCONTEXT

Overthelast10months,theprojectteamengagedwithover150expertsandheld10
workshopsinordertoanswerpivotalquestions

IndustryLeaders Innovators

Gainedoversight,guidanceandthoughtleadershipfromCsuiteexecutives, Heldinpersonandphoneinterviewswithover100innovativenewentrants
operatingunitleadersofglobalfinancialinstitutions, andindustryregulators and subjectmatterexperts

GlobalWorkshops
Facilitated10multistakeholderworkshopsatsixglobalfinancialhubswithover300totalparticipants,including
industryleaders,innovators,subjectmatterexperts, andregulators

DavosKlosters,Switzerland London,UK NewYork,USA SanFrancisco,USA Shenzhen,China Toronto,Canada

January2017 February2017 March,April2017 March2017 April2017 May2017

WORLDECONOMICFORUM|2017 10
Context&Approach KeyFindings KeyUncertainties 10
 Section2
KeyFindingsandUncertainties

WORLDECONOMICFORUM|2017 11
 KEYFINDINGS|OVERVIEW

Fintechshavechangedhowfinancialservicesarestructured,provisionedand
consumed,buthavenotsuccessfullyestablishedthemselvesasdominantplayers
Manyfintechs(small,technologyenablednewentrants)cameintoexistencewiththegoalofovertakingincumbentsasthenew
dominantplayersinfinancialservices buthaveshiftedtobuildingpartnershipsastheystrugglewithscaleandcustomeradoption

WHEREFINTECHSHAVESUCCEEDED WHEREFINTECHSHAVEFALLENSHORT

Fintechshaveseizedtheinitiative definingthe Customerwillingnesstoswitchawayfrom

direction,shapeandpaceofinnovation across incumbentshasbeenoverestimated.Customer
almosteverysubsectoroffinancialservices and switchingcostsarehigh,andnewinnovationsare
havesucceededasbothstandalonebusinessesand oftennotsufficientlymaterialtowarranttheshiftto
crucialpartsoffinancialvaluechains anewprovider,especiallyasincumbentsadapt*

Fintechshavereshapedcustomerexpectations, Fintechshavestruggledtocreate newinfrastructure

settingnewandhigherbarsforuserexperience.
Throughinnovationslikerapidloanadjudication
fintechshaveshownthatthecustomerexperience
barsetbylargetechnologyfirms,suchasAppleand
Google,canbemetinfinancialservices
CONCLUSION
andestablishnewfinancialservicesecosystems,
suchasalternativepaymentrailsoralternative
capitalmarkets.Theyhavebeenmuchmore
successfulinmakingimprovementswithintraditional
ecosystemsandinfrastructure

Fintechshavemateriallychangedthebasisofcompetitioninfinancialservices,buthavenotyetmaterially
changedthecompetitivelandscape

*Caveat:Ingeographieswhereincumbentserviceprovidersdidnotexistandinsegmentswhereincumbentswherenotmeetingcustomersegmentsneeds,
newentrantstofinancialserviceshavebeenabletobuildsignificantscale

12
Context&Approach KeyFindings KeyUncertainties 12
 KEYFINDINGS|OVERVIEW

Althoughfintechshavefailedtodisruptthecompetitivelandscape,theyhavelaidthe
foundationforfuturedisruption
Thesuccessoffintechsinchangingthebasisofcompetition,aswellastheincreasingpaceoftechnology,meansthatwhilefinancial
institutionshavethepotentialtoimproverapidly,theyfacerapiddisruptionbothnowandinthefuture

SOMEFINANCIALINSTITUTIONSHAVETURNEDTHETHREATOFFINTECHSINTOANOPPORTUNITY

Therapidgrowthofthefintechecosystemallowsfirmsto Theproliferationoffintechsprovidesfinancialinstitutionswith
externalizepartsoftheirinnovationfunction,astheywaitand asupermarketforcapabilities,allowingthemtouse
seewhichnewofferingsgaintractionbeforedeployingtheir acquisitionsandpartnershipstorapidlydeploynewofferings
ownsolutions

BUTTHEACCELERATINGRATEOFCHANGEREPRESENTSASERIOUSTHREAT

Theacceleratingtempooftheinnovationcycleinfinancial
servicesmeansthatafinancialinstitution'ssuccessis
predicatedonbusinessmodelagilityandtheabilitytorapidly
deploypartnerships,neitherofwhicharetraditionalcore
competenciesoftheseinstitutions
Context&Approach KeyFindings KeyUncertainties
Theabilitytoshopthefintechlandscapeforcapabilitiesisnot
limitedtoincumbentinstitutions;today,newentrantsface
significantlylowertechnologicalbarrierstoenteringfinancial
services, withpotentiallongtermimplicationsforthe
competitivelandscape
13
13
 KEYFINDINGS|OVERVIEW

Theprojectteamhasidentifiedeightforcesthathavethepotentialtoshiftthe
competitivelandscapeofthefinancialecosystem

DISRUPTIVEFORCES

CostCommoditization:Financialinstitutionswillacceleratethecommoditizationoftheircostbases,removingthemas
1 pointsofcompetitionandcreatingnewgroundsfordifferentiation

ProfitRedistribution:Technologyandnewpartnershipswillenableorganizationstobypasstraditionalvaluechains,thereby
2 redistributingprofitpools

ExperienceOwnership:Powerwilltransfertotheownerofthecustomerinterface;puremanufacturersmusttherefore
3 becomehyperscaledorhyperfocused

PlatformsRising:Platformsthatoffertheabilitytoengagewithdifferentfinancialinstitutionsfromasinglechannelwill
4 becomethedominantmodelforthedeliveryoffinancialservices

DataMonetization:Datawillbecomeincreasinglyimportantfordifferentiation,butstaticdatasetswillbeenrichedby
5 flowsofdatafrommultiplesourcescombinedandusedinrealtime

BionicWorkforce:Astheabilityofmachinestoreplicatethebehavioursofhumanscontinuestoevolve,financial
6 institutionswillneedtomanagelabourandcapitalasasinglesetofcapabilities

SystemicallyImportantTechs:Financialinstitutionsincreasinglyresemble,andaredependenton,largetechfirmsto
7 acquirecriticalinfrastructureanddifferentiatingtechnologies

FinancialRegionalization:Divergingregulatoryprioritiesandcustomerneedswillleadfinancialservicesindifferentregions
8 oftheworlddowndistinctpaths
Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 14
 KEYFINDINGS|COSTCOMMODITIZATION

Financialinstitutionswillacceleratethecommoditizationoftheircostbases,
removingthemaspointsofcompetitionandcreatingnewgroundsfordifferentiation
Facingenormouspressuretoreducetheircostbase,incumbentfinancialinstitutionsareembracingnewtechnologies,aswellasworking
withlongtimecompetitorsandnewentrantsalike,tocommoditizecostdriversthatdonotprovidecompetitivedifferentiation

ARCHETYPES

Mutualization Externalization Automation

Incumbentsareexploringthecreationof Therangeofactivitiesthatfinancial Seekingtopreservemargins,incumbents

newutilitiesandtheexpansionofexisting institutionsarecomfortablewith areturningtoprocessautomationtoolsto
utilitiesroles,inordertostandardize externalizinghasexpandedsignificantly, streamlineprocessesandlowerinternal
processesandavoidduplicatingwork creatingopportunitiesforbothfintechs costsofactivities,suchaserrorhandling
betweencompanies andincumbentstoservetheseneeds

Example: TheMonetaryAuthorityof Example:BlackRocksAladdinplatform Example: AutomationAnywhereis

Singaporeisworkingwithseveralbanksto
buildanationalKnowYourCustomer(KYC)
utility,whichwillreduceduplicationand
lowercostsforallfinancialinstitutions
Context&Approach KeyFindings 1 2 3 4
providesriskanalysis,portfolioconstruction
andcompliancetoolsforinstitutional
investorsandretailwealthmanagers.The
platformprovidestechnologyandsupport
forindustrystandardprocesses
5 6 7 8 KeyUncertainties
workingwithawiderangeofbanksto
automateprocessessuchasloan
origination,auditcomplianceandaccount
reconciliation
15
 KEYFINDINGS|COSTCOMMODITIZATION

Sharingcostsamongpeersandutilizingindustrystandardautomationtoolswill
deverticalizethevaluechain

ImplicationsforFintechs
TheriseofcostsharingutilitiesandB2B ImplicationsforRegulators
providerslowersthebarrierstoentry Regulatorsneedtomonitorthegrowth
fornewentrants ofutilitiesandbusinesstobusiness
(B2B)serviceproviders,andconsider
theirpotentialsystemicrisks

Fintechs Regulators
ImplicationsforAll
FinancialInstitutions
Organizationsmustviewpartnerships
andecosystemmanagementasa
companywidestrategicfocus
Organizationswillhavetostart
thinkingofsecurityandpermissionsas Incumbents
ajigsaw eachpiecewillhavetobe
treatedseparatelytominimizethe
threatfromanynewexternal
connection
Organizationswillneedtoimprove
trackingofdataflowstoprotectusers,
asinformationissharedwithexternal ImplicationsforIncumbents
companies Incumbentswillneedtodifferentiate
theircustomerfacingprocesses,as
middleandbackofficesbecome
commoditized

Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 16

 KEYFINDINGS|PROFITREDISTRIBUTION

Technologyandnewpartnershipswillenableorganizationstobypasstraditional
valuechains,therebyredistributingprofitpools
Thelocationofprofitpoolswithinandbetweenvaluechainswillshiftastechnologicalcatalystsenablecompaniestochange their
positionsandrelationships

ARCHETYPES

IntraValueChainDisruption InterValueChainShifts TechnologicalValueBridge

Existingvaluechainparticipantsare Technologyisallowingconsumersto Newtechnologiescansimplify

bypassingtraditionalintermediariesand
seekingpartnershipsdirectlywith
customerfacingstartups,thereby
becomingdirectcompetitorswithpast
partners
easilyswitchbetweenproductsin connectionswithinlargeandcomplicated
differentvaluechains,migratingprofit networks,makingcompaniesthatfocused
poolstoneworganizations onconnectingparticipantsmore
vulnerabletodisruption

Example:MunichRe,alargereinsurer,is Example:Investmentfirmssuchas Example: Stripeoffersonlinemerchants

partneringwithproductstartups VanguardandBettermenthavestarted aneasyandcosteffectivewaytoprocess
includingBoughtByManyandTrv to proposingexchangetradedfunds(ETFs) paymentsonline,whichwaspreviously
directlycompetewiththeirtraditional asanalternativetosavingsaccounts, onlyaccessibletolargemerchantswith
insurancepartners shiftingcustomersfrombankdeposits merchantbankaccounts

Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 17

 KEYFINDINGS|PROFITREDISTRIBUTION
Asprofitpoolsshiftduetovaluechainmovements,intermediarieswillface
competitivepressurefromallsides
ARCHETYPES(CONTINUED)
RegulatoryDisruption
Regulatorsarecurtailingfinancial
institutionscontroloveraccessto
infrastructure,loweringmarketpower
andshiftingprofitsawayfromfirmsthat
overseeinfrastructure
Example:TheEuropeanUnion'srevised
PaymentServicesDirective(PSD2)
threatenstodisintermediatepayment
networksbymandatingthatbanksallow
open,secureconnectionsbetween
merchantsanduseraccounts
Context&Approach KeyFindings 1 2
ImplicationsforFintechs
Thepoolofpotentialpartnersthat
canprovidescale,capitaland
customerreachwillexpandbeyond
traditionaladjacencies
Fintechs
Incumbents
ImplicationsforAllFinancial
Institutions
Technologywillreducethecostof
bypassingvaluechainintermediaries
andreachingtheendcustomer
Companieswillneedtomonitortheir
adjacenciesforpotential
pressures/shiftsfrompartners
3 4 5 6 7 8 KeyUncertainties
ImplicationsforRegulators
Regulatorsmustmonitortheshiftin
profitpoolsinordertoidentifythenew
valuechain,aslongregulated
companiesbecomelessrelevantand
newcompaniesgrowinimportance
Regulators
ImplicationsforIncumbents
Intermediariesthatderivevalue
fromtheirpositiononthevalue
chainwillstruggletobeprofitable
scalewillbenecessaryforsurvival
18
 KEYFINDINGS| EXPERIENCEOWNERSHIP

Powerwilltransfertotheownerofthecustomerexperience;puremanufacturers
mustthereforebecomehyperscaledorhyperfocused
Theriseofplatformsmeansincumbentscannolongerrelyoncontrollingbothproductmanufacturinganddistribution,allowingproduct
distributorstoleveragecontroloftheircustomerexperienceandplacepressureonmanufacturers

ARCHETYPES

BrandOpportunity ProductCuration ControlofData

Distributorsownershipofthecustomer Distributorscontrolwhichproductsare Thedistributorslocationinavaluechain

relationshipplacestheminapositionto distributedandhowcustomersview allowsittocollectdatathatisbothdeep
growtheirbrandwhiledeemphasizing products,andcanevensteercustomers (acrosstheentirevaluechain)andbroad
thatofthemanufacturer,particularlyin towardscertainproductsvia (dataonallproductmanufacturers)
caseswhereproductsarecommoditized recommendations

Example:Customersofroboadvisors Example:TheAppleAppStoreallows Example: Mastercardoffersretailers

suchasWealthfrontpurchaseETFsfroma almostallappsthatpassasetofrules,but advisoryserviceswithbenchmarksand
widerangeofcompanies,butlikelyhave stringentlycontrolsthefrontpage recommendations,drawnfromits
limitedawarenessoftheassetsin crucialforvisibility, withover1,600apps visibilityintodatacollectedfrom
theirportfolio launchedperday comparableretailers

Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 19

 KEYFINDINGS| EXPERIENCEOWNERSHIP
Customerswillinteractwithfewerandfewerdistributorsinthefuture,asthe
marketconsolidatesandmajorfirmsgainmarketshare
ImplicationsforFintechs
Fintechs,lackingbothanexisting
customerbaseandtheabilityto
scalequickly,willhavetofindniches
iftheywishtobecomedistributors
Incontrast,distributorsmayhelp
fintechscompetewithincumbentsas
manufacturersofspecialized
financialproducts
ImplicationsforAll
FinancialInstitutions
Allfirmswillseektobedistributors
ofboththeirproductsandthoseof
others;theirsuccesswilldependon
theexistingmarketandwhether
theycancapturemindshare
Productdistributorsmaystruggleto
achieveubiquityandconsistencyof
experienceacrossanincreasingly
fragmenteduniverseofconnected
devices
Context&Approach KeyFindings 1 2
ImplicationsforAllPlayers ImplicationsforRegulators
Productdistributionrepresentsa Regulatorswillhavetoguardagainst
likelypointofentryforlargetech productdistributorsabusingtheir
firms,duetotheirexpertise marketpower,especiallyinopen
platforms wheredistributorscontrol
thecustomershoppingexperience
Questionsabouthowdistributors
andmanufacturersshareliabilitywill
havefarreachingconsequences
Fintechs Regulators
ImplicationsforIncumbents
Incumbents Incumbentswillhaveadvantagesin
theracetobecomedistributorsdue
totheirexistingcustomerbase
However,incumbentsthatfailto
becomeproductdistributorswillsee
adeclineinproductprofitmargins
duetocostcommoditization
3 4 5 6 7 8 KeyUncertainties 20
 KEYFINDINGS|PLATFORMSRISING

Platformsthatoffertheabilitytoengagewithdifferentfinancialinstitutionsfroma
singlechannelwillbecomethedominantmodelforthedeliveryoffinancialservices
Theshifttomultipleproviderplatformsasachanneltodistributeandtradeisgraduallyemergingacrossgeographiesandthroughouta
widerangeoffinancialproducts herearejustafewexamplesofwhathasbeendeveloped

ARCHETYPES

B2CProductDistributionPlatforms SegmentPlatforms DataAggregationPlatforms

Retaildistributionoffinancialproducts Preexistingplatformsthatcaterto Platformsthataggregatecustomerdata

willtakeplacewithindigitalplatforms, specificbusinessneedsandaudienceswill fromdifferentfinancialinstitutionswill
eitheropenorcurated,wherecustomers addfinancialproducts,ineffectbecoming increaseinnumberandscope,reaching
willhavetheabilitytochoosebetween distributionchannelsforfinancialservices allsectorsandallowingcustomersgreater
multipleproviders controlovertheirdata

Example: TencentsWebankplatformacts Example:Wavesaccounting,invoicing Example: TheUnitedKingdomis

asastorefront,allowingretailcustomers andreportingplatformforsmall developingapensionsdashboard,
topurchaseproductsfrommultiple businessesofferskeyfinancialservices aggregatinginformationfrominsurersand
competingvendorsofcreditandasset suchaspaymentsorlendingdirectly,as assetmanagerstoallowcustomersto
managementservices wellasthroughpartnerslikeADPandRBC viewandmanagealltheirsavingsinone
location
Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 21
 KEYFINDINGS|PLATFORMSRISING

Theriseofcustomerchoicewillhaveprofoundimplicationsonthedesignand
distributionofproducts,andwillforcecompaniestoshiftroles

ImplicationsforFintechs
Platformsallowproductfocused ImplicationsforRegulators
fintechstheopportunitytoscalequickly Uncertaintiesaroundwhoisthe
responsiblepartywillneedtobe
resolvedinbothB2CandB2Bmarkets
forissuessuchasproductsuitabilityand
liability
Fintechs Regulators
ImplicationsforAll
FinancialInstitutions
Productdifferentiationwillbecome
criticalwhereinstitutionsdonot
controlthesales/distributionchannel
Platformownerswillneedtobecome
capableecosystemmanagers,
balancingtheneedsoftheproduct Incumbents
manufacturerswithcustomerdemand
Platformswillnaturallycapturemarket
datafromallparticipants,addingto ImplicationsforIncumbents
theplatformowner'smarketpower
Productswillneedtobestandalone
Platformownersandproductowners
profitabletobesustainableinaplatform
willneedtoaddressopenquestions
environment(nomorelossleaders)
abouttheliabilityofproductsplaced
onplatforms Improvedpricecomparabilitywillfavour
largeincumbentswhereproduct
economiesofscaleexist

Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 22

 KEYFINDINGS|DATAMONETIZATION

Datawillbecomeincreasinglyimportantfordifferentiation,butstaticdatasetswill
beenrichedbyflowsofdatafrommultiplesourcescombinedandusedinrealtime
Organizationswillhavetouseacombinationofdatastrategiestocollectthedepthandbreadthofdataneededtofollowthe leadof
techfirmsindatamonetization

ARCHETYPES

FlowsvsSnapshots ExperienceDrivenData PartnershipsforData

Institutionsarestartingtocollectreal Inordertoexpandtheircustomerdata Partnershipswithothercompaniessolely

timedataflowsinordertoutilize setstocollectnewstreamsofdata, forthepurposeofdatacollectionwill
advancedanalyticsandtargetcustomers institutionsaredesigningtheirdigital increase,allowingbanks(andnonbanks)
whochangetheirbehaviour experiencetooffermorecustomervalue, tocollectcomplementarydatathey
(andneeds)overtime thusengagingcustomersmorefrequently otherwisewouldnothaveaccessto

Example: Visacollectslocationdatafrom Example:Facebookcontinuallyimproves Example:AIBispartneringwithretailers

itscustomersonanongoingbasis(using andaddsfeaturestoitsmobileappto tooffercashbackstocustomers;inreturn,
customersphones)insteadofona increasecustomerengagementand retailersreceivecustomerdata,which
snapshotbasis(viatransactions)inorder collectmoredatapoints theycanusetoprovidetargetedoffers
tobetterdetectfraudulenttransactions

Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 23

 KEYFINDINGS| DATAMONETIZATION

Asfinancialinstitutionsseektoincreasetheamountandvarietyofdatathey
collect,ownershipandcontrolofdatawillbecomeakeyissueforallstakeholders

ImplicationsforFintechs ImplicationsforRegulators
Incumbentswillneedhelptomanage, Regulatorsmustcarefullymonitorthe
useandsecuretheirdata,creatinga sharingofdatatoensurethattheriskof
newbusinesslineforfintechs hackingisaslowaspossible
Regulatorsmustalsobeawareofhow
banksusetheadditionaldatathey
Fintechs Regulators
collect,andwhethercustomers
understandtheimpactofsharingtheir
information
Regulatorsmustdecidehowmuch
consumerscancontroltheirown
informationthattheyhavesharedwith
institutions

Incumbents

ImplicationsforAll
FinancialInstitutions
ImplicationsforIncumbents
Datasecuritywillbecrucialin
establishingandmaintainingtrustwith Incumbentswillhavetodecideonthe
thecustomer valueofmigratingexistingdatainlegacy
systemstoenvironmentswhereitcan
Newpartnershipsbasedondatawill
bemoreeffectivelymaintained,versus
createanimperativeforacompany
implementingtoolsandstrategiesfor
widepartnershipstrategy
collectingnewdata
Nationaldataregulatorswillplaya
largerroleinfinancialservices
Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 24
 KEYFINDINGS| BIONICWORKFORCE

Thearrivalofnewtechnologies,suchasartificialintelligence,willmeanmajorshiftsin
financialinstitutionsworkforcesasthedefinitionoftalentevolves
Organizationswillneedtomanagetalentasacollectivesetofemployeesandmachineenabledsolutions,especiallyascognitive
technologiescontinuetodevelopandincreaseinrelativeimportance

ARCHETYPES

FrontEndAI CoworkingwithAI SuiteofCapabilities

Thepublicfacethroughwhichcustomers Humansandcomputersworkingtogether Asanorganization'sworkforceshiftsfrom

interactwithfinancialorganizationswill willhavea"forcemultiplyingeffect beingsolelyhumantoahumanAImix,
beAI,similartotheAInowdominating comparedtohumansorAIalone,given leadershipwillshiftitsfocusfrom
interactionsbetweencustomersandtech enoughtrainingandroledefinition managingteamsofpeopletomanaging
firms suitesofcapabilities

Example: BankofAmericaislaunching Example: Ayasdiworkedwithamajor Example:Whilethisideahasyettobe

Erica,achatbot,inordertoengagewith banktoimproveitsstresstesting,froma tested,academiaisgraduallyaccepting
customersandofferanswersinthemould ninemonthprocessrequiringhundredsof theneedtomanageAIsimilarlyto
ofApplesSiriorAmazonsAlexa employeestoathreemonthprocess humans4,5
usinglessthan100specialists

Sources:1.HBR2.MITSloanManagementReview

Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 25

 KEYFINDINGS|BIONICWORKFORCE

Theevolutionoftalentwillfundamentallyshifttheroleofhumancapitalwithin
financialinstitutions

ImplicationsforFintechs ImplicationsforRegulators
AIandautomationfocusedfintechs Regulatorswillneedtodevelopnew
willbeindemandascompaniesseek strategiesfordealingwithAI,including
toquicklygainexpertise enforcementandpunishmentofnon
compliantactionsbyAI

Fintechs Regulators

ImplicationsforAll
FinancialInstitutions
AIriskmanagementwillbeapriority Incumbents
AIrepresentsasinglepointoffailure
Technologicalimprovementsarelikely
tocomeinwaves,meaningthat ImplicationsforIncumbents
changesfromAIwillimpactsomeparts
oftheorganizationatdifferentrates Incumbentswillhavetofigureouthow
thanothers tocommunicatetheirculturethrough
customerfacingAI
Companieswillneedtomanagethe
balancebetweenhumanAI Incumbentswillneedtohaveastrategy
interactions,andtraintheiremployees onhowtoacquireAIexpertise
toeffectivelycoexistwithAI

Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 26

 KEYFINDINGS|SYSTEMICALLYIMPORTANTTECHS

Financialinstitutionsincreasinglyresemble,andaredependenton,largetechfirmsto
acquirecriticalinfrastructureanddifferentiatingtechnologies
Theriseofdigitalinterfacesanddatainfinancialinstitutionsmeansthatthoseinstitutionsincreasinglyfocusondeveloping largetech
capabilities,whichisaccompaniedbyanincreasedrelianceonlargetechfirms

ARCHETYPES

Infrastructure PlatformsandData DigitalExperience

Financialinstitutionsofallsizesare
increasinglydependentonlargetechs
cloudbasedinfrastructuretoscaleand
deployprocessesandtoharnessartificial
intelligence(AI)asaservice
Financialinstitutionshaveusedthe
exampleoflargetechssuccessfully
unlockingdataandrevenuesfrom
customerplatformstoguideandshape
theirownefforts
Largetechshavefocusedforyearson
makingtheircustomers'digitalexperience
simpleandpainfree,andfinancial
institutionsarenowmovingtomatch
thisstandard

Example:AmazonWebServices(AWS)is Example:JPMorganisinvestinginthe Example: MacquarieBankisusingUber

formingthebackboneofthefinancialservices
ecosystem,withadiversesetoffirms from
JPMorgantostartupssuchasXignite
adoptingAWSfordatastorageand
processing
Sources:3.FT4.CMO
collectionandanalysisofitscustomers
datawithanewcustomermanagement
andanalyticstool,enablingcrossselling
"alittlebitlikehowAmazonsuggests
whatyoumightliketobuynext 2
andGoogleasguidesforitsdigital
experience:Youasacustomershouldbe
interactingwithabankinthesameway
youinteractwiththerestofyourlife3

Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 27

 KEYFINDINGS|SYSTEMICALLYIMPORTANTTECHS

Thecomingcollisionbetweenfinancialinstitutionsandlargetechsleadstotough
choicesforallfirms:becomedependentonlargetechsorriskfallingbehind

ImplicationsforFintechs ImplicationsforRegulators
Fintechsmayhaveopportunitiesto Howlargetechsaretreatedunder
workwithlargetechstobroadentheir traditionalregulatoryframeworkswill
reach,whilealsohelpinglargetechs havealargeimpactontheirinteractions
enterfinancialmarkets withfinancialinstitutions
Fintechsmaybeattractivetargetsfor
incumbentsseekingtoacquire Fintechs Regulators
technicaltalent

Incumbents

ImplicationsforAll
FinancialInstitutions ImplicationsforIncumbents
Allfinancialinstitutionswillneedto Incumbentswillhavetocompetewith
findwaystopartnerwithlargetechs largetechsfortalent,drivingupthecost
withoutlosingtheircorevalue oftechnologytalent
proposition
Incumbentsriskfallingfarbehindon
Allfirmsriskbecomingdependenton technologicalofferingsiftheyminimize
largetechs,whichnecessitatestheloss engagementwithlargetechstoprotect
ofsomecontroloverbothcostsand independence
data
Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 28
 KEYFINDINGS| FINANCIALREGIONALIZATION

Differingregulatorypriorities,technologicalcapabilitiesandcustomerconditions
arechallengingthenarrativeofincreasingfinancialglobalization
Thetrendtowardsfinancialglobalizationisgivingwaytoregionalmodelsoffinancialservicessuitedtolocalconditions,led bythe
complexityofdifferingcustomerneedsanddifferencesinsolutionsaroundtheworld

ARCHETYPES

Europe China USA

Astrongregulatoryimpetusforopendata Amobilebasedconnectivityecosystem, Unclearregulatorydirection,aswellas

andconsumerprotectionisdrivingthe theabsenceofmajorconsumerfocused thepresenceofamaturefinancial
developmentofplatformecosystemsin bankofferingsandalargelyinnovation ecosystemandwellservedcustomers,
manyverticals,withincumbentsunder friendlyregulatorallleadtolargetechs meansthatchangestothecurrent
growingpressure capturingsignificantmarketshare ecosystemwilllikelybeincremental

Example: TheEuropeanMarketsin Example: Intheabsenceofamature Example: TheAutomatedClearingHouse

FinancialServicesDirectiveisdesignedto
introducemoretransparencytocapital
markets;tradeexecutionfirmsmustshow
clearevidenceof"bestexecution"
paymentssystem,theAlipaymobile
paymentappnowownsover50%ofthe
$5.5trillionChinesemobilepayments
sector,withtechgiantTencentasitsonly
majorcompetitor
(ACH)Networkismovingtosameday
payments,butprogressremainsslow
comparedtoothercountries(suchasthe
UnitedKingdom,whichadoptedrealtime
paymentsoveradecadeago)

Context&Approach KeyFindings 1 2 3 4 5 6 7 8 KeyUncertainties 29

 KEYFINDINGS| FINANCIALREGIONALIZATION
Increasinglydivergentregionalfinancialsystemsmeanthatlocalplayerscould
quicklygainmarketshare,butinternationalgrowthisdifficult
ImplicationsforFintechs
Fintechswillfaceseriousobstaclesto
establishingthemselvesinmultiple
jurisdictions,evenastechnology
theoreticallylowersbarrierstoentry
ImplicationsforAll
FinancialInstitutions
Thebreedinggroundforfintech
innovationmaybecomeevenmore
multipolar,asfirmswithofferings
specializedtotheirlocalewill
strengthenregionalfintechhubs
Newideascanbetestedinone
geographyandintroducedtoother
areasonceconditionschange
Regionalizationofemerging
capabilitieswillforcethecreationof
differentsolutionstosimilarproblems
Context&Approach KeyFindings 1 2
ImplicationsforRegulators
Regulatorswillfacetwoopposed
pressures:largeincumbentswillpush
forglobalconvergence,andlocalfirms
willpressforlocalizedregulations
Fintechs Regulators
Incumbents
ImplicationsforIncumbents
Globalfirmswillneeddistinctstrategies
tocultivateregionalcompetitive
advantagesandintegratewithlocal
ecosystems
Incumbentsmaybecomeattractive
partnersforfintechsseekingtoenter
newmarketsastheylookfor
opportunitiestorapidlyscale
3 4 5 6 7 8 KeyUncertainties 30
 KEYFINDINGS|CROSSCUTTINGUNCERTAINTIES

Inadditiontothekeyfindings,thefollowingopenquestionswillshapethe
industry'sdevelopment thepathforward,however,isuncertain
Thesequestionswillinfluencethefutureofallfinancialservicessectors,andarethusoftensubjectsofdiscussion butthe current
discussionholdsmorequestionsthananswers

UNCERTAINTIES

RoleofIdentity MonetizationofDataFlows Technology GovernanceGap

Howwilltheriseofdigitalidentityimpactits Howcanfirmsextractthemostrevenues Howwillfinancialservicesfirmsmitigate
useinfinancialservicesaroundtheworld? fromthedataavailabletothem?Howmuch riskwhentechnologyracesaheadof
willitcost? managementsabilitytounderstandthe
consequences?

SystemicTransparency
Howwillthetransparencybuiltintonew
systemsimpacttheirdesign,participants
rolesortheirprofitmodels?
CooperationProblems
Canfinancialservicesfirmsusetechnology
tosolvelongrunningpartnershipand
collaborationissuesthatlieattheheartof
theindustry?

Context&Approach KeyFindings KeyUncertainties 31

 KEYFINDINGS|REFERENCES

References

1. HowArtificialIntelligenceWillRedefineManagement.HarvardBusinessReview(HBR).Retrievedfromhttps://hbr.org/2016/11/howartificialintelligencewillredefine
management
2. AreYouReadyforRobotColleagues?.MITSloanManagementReview. Retrievedfromhttp://sloanreview.mit.edu/article/areyoureadyforrobotcolleagues/
3. JPMorganChaseinpushtominecustomerdata.FinancialTimes(FT).Retrievedfromhttps://www.ft.com/content/1eaf6436e4a211e69645c9357a75844a
4. CDOinterview:MacquarieBankingGroupsdigitalleaderondeliveringcustomertrust.CMOfromIDG. Retrievedfromhttps://www.cmo.com.au/article/609962/cdo
interviewmacquariebankinggroupdigitalleaderdeliveringcustomertrust/?pp=2

Context&Approach KeyFindings KeyUncertainties 32

 Section3
SectorDeepDives

WORLDECONOMICFORUM|2017 33
SECTORDEEPDIVES|READINGGUIDE

ReadingGuideforSectorDeepDives
Eachsectordeepdiveisorganizedaccordingtoacommonstructure:contextonthesectorandrecentinnovations,ananalysis of key
trendsanduncertainties,andseveralpotentialendstatesillustratingevolutionsofthesectorincomingyears

Introduction Findings Uncertainties PotentialEndStates Conclusion

Ahighleveloverview Anoverviewofthe Anoverviewofkey Descriptionofseveral Keytakeawaysfor

ofthekeyinnovations keyfindingsshaping uncertaintieswhose plausiblebut financialinstitutions
withinthesectorthat thesectorandthe resolutionwillshape divergentpotential andallmembersof
haveemergedin underlyingdriversof thesector'sfuture endstatesforthe thesectorecosystem
recentyears eachfinding industry
Supportingevidence Criticalconditionsand
forthefinding,aswell earlysignsforeach
asillustrativecase possibleendstate
studies
Implicationsmapped
tokeyecosystem
stakeholders

Atrackeroneachpageillustratesthereaderspositioninthesectordeepdive

Introduction Findings Uncertainties EndStates Conclusion 34

Section3.1
Payments

WORLDECONOMICFORUM|2017 35
PAYMENTS|INTRODUCTION

Paymentshavegreatlyevolvedinthelastseveralyears.Thissectionexaminesthe
keytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawrapidchangeinthepaymentslandscape,withtheglobalentryofseveralinnovativeforcesthatraised
fundamentalquestionsaboutthefutureofpayments

CIRCA2015,THEMAJORFORCESIMPACTINGPAYMENTSWERE

MobilePayments AlternativePaymentRails SeamlessPayments

The2014launchofApplePay Interestgrewinthepotential Uberfamiliarizeduserswitha

openedthedevelopedworldtothe applicationsofalternative paymentexperiencethathadno
potentialofmobilepayments currencies,suchasbitcoin momentofpayment

CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFPAYMENTSWERE

Willincumbentpayment Whatrolewillpayments Willtheriseof

Howmightthedominant
networksbeableto playinthebroadersuite multinationals(e.g.Apple
formfactorofpayments
respondtonewentrants ofofferingsfromfinancial Pay)leadtoglobal
change?
paymentsinfrastructure? institutions? paymentconvergence?

Note:Forthepurposesofdistinguishingonlineandinpersonbrickandmortarshopping,allinstancesofretailrefertobrickandmortar
shopping

Introduction Findings Uncertainties EndStates Conclusion 36

PAYMENTS|OVERVIEWOFFINDINGS

Paymentshavecontinuedtheirmigrationtodigitalchannelsinthefaceof
geographicallyvariedadoptionofmobilepaymentanddecliningprofitability

WHEREDIDDISRUPTIONOCCUR?

Paymentshavecontinuedtomigrateawayfromcashandbecomelessvisibletothecustomeras
A consumersshiftpurchasestoonlineandmobilechannels

Paymentsbusinessesareexperiencingintensepressureonmarginsinthefaceofcompetitionanda
B challengingregulatoryenvironment

Regionaldistinctionsbetweenpaymentsecosystemsaregrowing,asbothcustomerbehaviourand
C regulatoryenvironmentsdiverge

WHEREHASDISRUPTIONNOTOCCURRED?

Mobilepaymentsolutionshavenotsufficientlyexceededthefunctionalityofpreexistingsolutionsin
D cardbasedmarkets,thuslimitingtheiradoption

Customeracceptanceofnontraditionalpaymentschemes(e.g.alternativecurrencies)remainsalmost
E nonexistent

Introduction Findings Uncertainties EndStates Conclusion 37

PAYMENTS| FINDINGA

Paymentshavecontinuedtomigrateawayfromcashandbecomelessvisibletothe
customerasconsumersshiftpurchasestoonlineandmobilechannels
Onthebackofglobalshiftsincommercepatternsfrominpersontoonline,paymentvolumesandchannelshavenaturallyshiftedaway
fromcashtowardssimple,frictionlesssolutions,whichareoftenoperatedbylargetechfirms

SUPPORTINGEVIDENCE

Dominanceof Theglobalonlineshoppingmarketisgrowingquicklyattheexpenseofinpersonshopping,andtherefore
OnlineSales onlinebased(cashless)solutionswilldominatetheoveralltransactionlandscape

Especiallyinemergingeconomies,thenearubiquityofmobilephonescombinedwiththelackof
IncreaseinMobile
developmentintraditionalfinancialsolutionsisdrivingthedevelopmentoftechnologicallyadvanced,
Connectedness
mobilebasedsolutionsforpayments

Largetechfirmsaredrivingthedevelopmentofonlinepaymentplatformsinecommerce,causing
GrowingRoleof
paymentstobecomelessvisibletothecustomer;theactionofloggingintoanonlineplatformissufficient
OnlinePlatforms
toenableatransaction,withactualpaymentdetailsstoredinthebackground

Introduction Findings A B C D E Uncertainties EndStates Conclusion 38

PAYMENTS| FINDINGA

Paymentshavecontinuedtomigrateawayfromcashandbecomelessvisibletothe
customerasconsumersshiftpurchasestoonlineandmobilechannels(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

ChangeinUSBlackFridayShoppersby
Channel,20142015(million)4
8
Growthofonlinepaymentplatform Shifttoonlinesales 6
6
Amazonsonlinestoregrowth ThegrowthofChinasinpersonretail
represented53%ofoverallUSe shoppingmarketslowedto10%in
4
commercegrowthin2016,1 drivenby November2016,2 itslowestlevelof 2
thesuccessofAmazonPrime,which growthinoveradecade,ascustomers Inperson
nowhas80millionsubscribers.Amazon shiftedtheirshoppingfromretailto 0 1 2

isalsocreatinganecosystemaroundits
oneclickpaymentservicebyrollingit
outtoothermerchants(indirect
competitionwithPayPal,forexample).
Online
onlinechannels.SalesonSingles'Day, 2
whichrepresentsthebiggestoneday
saleinChinasonlineshoppingmarket, 4 3
grewmorethan32%in2016.3
Shiftfromretailtoonlineshopping

KEYUNCERTAINTIES
Theincompatibilitybetweencashanddigitalmarketplacesmeansthatpaymentswillonlycontinuetomovetowardscashlesssolutions

1 Willdominantonlinepayment 2 Howwillcardnetworksreactto 3 Inemergingmarkets,can

processors(e.g.Amazon,Stripe) therisingimportanceoflarge incumbentsenterandovercome
expandintoinpersonretailand techsinonlinepayments? locallybuiltsolutions?
ifso,cantheyachievescale?

Sources:1.SliceIntelligence2.FT3.CNBC4.Fortune.com

Introduction Findings A B C D E Uncertainties EndStates Conclusion 39

PAYMENTS|FINDINGB

Paymentsbusinessesareexperiencingintensepressureonmarginsinthefaceof
competitionandachallengingregulatoryenvironment
Increasingcompetition,coupledwithregulatoryforcesandtheriseofnewsolutionsontopofthetraditionalecosystem,meansthat
paymentprofitabilitywilldeclineinthefuture

SUPPORTINGEVIDENCE

Severaljurisdictions,includingEurope,CanadaandAustralia,haveeitherpassedorarepassinglegislation
limitingthefeeschargedontransactions,thuslimitingprofitabilityforallintermediaries.Europe,
InterchangeCaps specifically,isimplementingtheEUInterchangeFeeRegulation(IFR),andweakeninghonourallcards
rules(whichforbidmerchantsfromselectivecardacceptance),makinghighfeecreditcardsunattractive
formerchantstoaccept

Revolvers customerswhousecreditcardsasshorttermloanswithhighinterestrates areamajor

ErodingLending
sourceofcardprofits.Thismarketisfacingseriouspressurewiththeincreaseinalternativelenders,who
Revenue
targetthesamecustomersandoffermoreattractiveinterestrates

Thedevelopmentofnationallevelfasterpaymentschemeswillleadtoadecreaseinrevenuesfromother
FasterPayment paymentsources(wiretransfers,cheques,etc.)ascustomersmovetonewplatforms.Also,where
Schemes nationallevel fasterpaymentschemesexist,feestotheendconsumerarenonexistent,conditioning
customerstoexpectlowfeepaymentsinalltransactions

NewForeign TechnologicallyadvancedfintechsaremovingintoboththeretailandB2Bareas,loweringrevenuesthat
Exchange financialinstitutionscanearnonforeignexchange(FX).Severalbankshavedecidedtopartnerwitha
Solutions fintechsolutiontoofferFXservicesinsteadofoperatingtheirown,forgoingthatincomeentirely

Introduction Findings A B C D E Uncertainties EndStates Conclusion 40

PAYMENTS| FINDINGB

Paymentsbusinessesareexperiencingintensepressureonmarginsinthefaceof
competitionandachallengingregulatoryenvironment(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

EvolutionofCreditCardFeesinAustralia
3

NewFXsolutions Fintechcompetingonlending 2.5

MerchantFee(%)
2
TransferWise,aretailFXplatform, LendingClub,aswellasmanyofits
1.5
originallybrandeditselfasan competitorsinthealternativelending
alternativetohighbankfees,butin sector,haslongadvertisedtothe 1
recentyearshasbeguntoworkwith revolvingcreditmarket highlighting 0.5
selectbankstoexpanditscustomer lowerinterestrates,theabsenceof
0
base.Ithasannouncedpartnerships additionalfeesandtheabilitytoraise 2003 2005 2007 2009 2011 2013 2015
withN26inGermany,Starlinginthe creditscores.Asof2017,LendingClub VISA/MC AMEX
UnitedKingdomandLHVinEstonia(the claimsithasalreadyconvertedover
country'slargestbank). 300,000revolvers.5 Decliningcreditcardaveragemerchantfees6

KEYUNCERTAINTIES
Thedeclineinpaymentprofitabilitywillforceincumbentstolookelsewhere,includingatpaymentsdata,tobridgetheprofitgap

1 Willcardsbecomelessimportant 2 Canbanks/paymentproviders 3 WilltraditionalFXsolutions

partsofthepaymentsecosystem generatealternativeformsof competeorpartnerwithnew
asfeesdecrease? revenuefromfasterpayment fintechenabledsolutions?
schemes?

Sources:5.LendingClub.com6.Finder.com.au

Introduction Findings A B C D E Uncertainties EndStates Conclusion 41

PAYMENTS| FINDINGC

Regionaldistinctionsbetweenpaymentsecosystemsaregrowing,asbothcustomer
behaviourandregulatoryenvironmentsdiverge
Standardizedglobalpaymentssystemsremainelusiveaslocationspecificpainpointsandregulationsleadtolocalized
improvementsinpaymentssystems

SUPPORTINGEVIDENCE

Levelof Countrieswithoutmodernpaymentssystemsbenefittedgreatlyfrommobilepaymenttechnology,
UnmetNeeds whereasthebenefitsaremoremarginalincountrieswithmodernpaymentssystems.Asaresult,adoption
hasdifferedconsiderablybyregion,dependingonthedegreeofunmetneeds

Whethernewpaymenttechnologyisubiquitousalsogreatlyaffectstheadoptionofpaymentsolutions.The
Ubiquityof
Technology adoptionofmobilepaymentsolutionshasbeenmuchhigherinAfricaandAsia(wheremerchantshave
supportednewtechnologies)comparedtotheUnitedStates,wheremerchantshaveresistedadoption

ThecomingrolloutofPSD2willadvancethedevelopmentofnewpaymentschemesinEurope(andother
OpenPayments
jurisdictionsthatadoptsimilarlegislation,suchasAustralia),butitishighlyunlikelythatchangesto
Regulation
EuropeanpaymentswillinfluencetheregulationofUSmarkets

Countriesthatembracedemonetizationwillforcetheadoptionofmobilewallets,whichhastheeffectof
Demonetization givingmobilebasedsolutionstheneededcriticalmasstosucceed acriticalmassthatmaybealongtime
incomingincountrieswhereregulatorsdonotactasinnovationdrivers

Introduction Findings A B C D E Uncertainties EndStates Conclusion 42

PAYMENTS| FINDINGC

Regionaldistinctionsbetweenpaymentsecosystemsaregrowing,asbothcustomer
behaviourandregulatoryenvironmentsdiverge(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

TransactionsbyTypeinDifferent
Countries(%)
85
77
Demonetizationby Similarmarkets 68
53
theIndiangovernment differentadoptionrates
47
Attheendof2016,Indias Paymentexperiencescandiffer 32
demonetizationof500and1,000rupee significantlyeveninsimilarmarkets.In 23
15
notesledtomassadoptionofmobile Canada,regulationdrovemuchearlier
walletsinrecordtime thecompound adoptionofEMV(smart,orchip,cards)
annualgrowthrate(CAGR)for2016 comparedtointheUnitedSateswhere Australia France Germany US
wasexpectedtoreach160%,andthe retailerpressureslowedrollout.Asa Cash Card/Other
shareoftotaltransactionsisexpected result,only18.6%of2016USpointof
toreach57%by2022,upfromabout salestransactionsusedEMVincompared Varyingimportanceofcashindifferentcountries9
20%in2016.7 to90.7%inCanada.8
KEYUNCERTAINTIES
Theregionalizationofpaymentsecosystemswilllikelyaccelerateaslegislationandtechnologycontinuetodiverge

1 Howcanincumbentsand/or 2 Willdemonetizationschemes 3 Howwillthedivergingpayments

regulatorsencourageubiquitous catchoninotherpartsofthe ecosystemaffectonline
technologicalsolutions? world? transactions,ifatall?

Sources:7.Technavio8.TSYS9.InternationalJournalofCentralBanking

Introduction Findings A B C D E Uncertainties EndStates Conclusion 43

PAYMENTS| ANOTEONPSD2

ThecomingapplicationoftheEuropeanUnion'srevisedPaymentServicesDirective
(PSD2)byJanuary2018willgreatlyshiftthepaymentslandscapeinEurope
PSD2representsahostofchangestotheoriginalPaymentsServicesDirective(PSD)passedin2009,focusingonfourbroadthemes:
marketefficiency,consumerprotection,competitionandchoice,andsecurity

KEYCHANGES EFFECTONPAYMENTS

ThemainchangetotheoriginalPSDconsistsoftwonewentities,
Paymentinitiationservicesallowmerchantsto
withbankscreatingamodelofsimpleandsecureaccess:
linkdirectlytothecustomersbankaccount,
bypassingaseriesoftraditionalintermediariesto
lowercosts

PaymentInitiation
Services
Theseallowuserstoinitiate
paymentsdirectlyfromtheir
bankaccountstomerchants
Accountinformationserviceswillallowservices
AccountInformation thataredependentoncustomerinfo,suchas
Services accountaggregationserviceslikeMintandYodlee,
tooperatewithoutbankaccountpasswords,
Theseallowuserstoauthorize increasingsecurity
servicestoaccesstheirbank
accountinformation KEYUNCERTAINTIES

Concurrently,theEuropeanUnionisrollingouttwomajor WhatwillthePSD2implementationtimelinebe,and
paymentsrelatedchangesaspartofIFR(InterchangeFee 1
howwillbanksreact?
Regulation):
Interchangefeesarecappedat0.20.3%oftransactionvaluefor HowwillEUregulatorsmonitorandenforcethe
debitandcredit,respectively
2 degreeofinstitutionalcompliancewithPSD2,andwill
thisdifferbycountry?
Thehonourallcardsrule(forbiddingmerchantsfromselective
cardacceptance)nolongerapplies;instead,cardsarenowsorted Willthisdriveinnovationatthemerchant/intermediary
3
bycategory,andretailerscanchoosewhichcategoryofcardsto level,andwillcustomersadapt?
accept
44
PAYMENTS| FINDINGD

Mobilepaymentsolutionshavenotsufficientlyexceededthefunctionalityofpre
existingsolutionsincardbasedmarkets,thuslimitingtheiradoption
MobilepaymentsolutionshavenotbecomeaspervasiveintheUnitedStatesandEuropeasinotherpartsoftheworld,duetothe
overwhelmingdominanceofcardbasedsolutions

SUPPORTINGEVIDENCE

Customersarereluctanttotryanewmethodofpayment(mobile)withoutaclear,demonstrated
SwitchingCostsvs
IncrementalValue improvement.Ingrainedbehavioursmeanthatthelesssignificantofanimprovementanewsolution
represents,thelesspatiencecustomerswillhavewithit

Lackof Theubiquityofcardbasedtechnologieshasmeantthatmanyvendorssimplydonotsupportmobile
Ecosystem payments,anditisoftendifficulttoidentifyvendorsthatdo.Thiscreatesanegativelooparoundthe
Support technology thelesssupport,thelesscustomerswillwanttoadopt,whichleadstolesssupport

Manycardbasedmarketsalsolackoneconsistentmobilepaymentstandard,meaningthatevenifstores
Lackof
acceptmobilepayments,itisoftenunclearwhichoneofseveralsolutionswillwork/notwork,further
SingleStandard
cloudingtheseamlesscustomerexperience

Introduction Findings A B C D E Uncertainties EndStates Conclusion 45

PAYMENTS| FINDINGD

Mobilepaymentsolutionshavenotsufficientlyexceededthefunctionalityofpre
existingsolutionsincardbasedmarkets,thuslimitingtheiradoption(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

ApplePayUsersvsAlipayUsers
asof2016(million)12

Gradualgrowth,butlowusage
ApplePayhasgrownsinceits
introduction,withApple'sChief
ExecutiveOfficerTimCookannouncing
thattheworldwidenumberof
transactionsroseby450%yearover
year.However,thirdpartyadoption
studiespaintamoremixedpicture,
withdecreasingsameuserusageand
frequencysinceApplePaywas
launchedin2014.10
Failureofretailerbackedsolution
CurrentC,amobilepaymentappbacked
byretailersincludingWalmart,Target
450
andWendys,shutdownmid2016asa
resultoflowadoptionandretailers 12
pullingoutofitsservice.11 Fracturesin
theretailergroupduetodifferent
loyaltyprogrammes,aswellaslow
adoptionandusage,ultimatelyledtoits
demise. Mobilepaymentsolutionadoptionin
differentmarkets

KEYUNCERTAINTIES
Untilmobilebasedsolutionscandemonstratesustainableadvantagesovercards,theiradoptionincardbasedmarketswillremain gradual

1 Howwillmajorplayersinmobile 2 Doesusingamobilepayment 3 Willsuccessfulincumbentsfrom

paymentsconvincecustomersto solutionhaveadditional emergingmarketsbeableto
switchfromcards? advantagesyettobeunlocked? entercardbasedmarkets?

Sources:10.PYMNTS.com11.ArsTechnica12.Forbes

Introduction Findings A B C D E Uncertainties EndStates Conclusion 46

PAYMENTS| FINDINGE

Customeracceptanceofnontraditionalpaymentschemes(e.g.alternativecurrencies)
remainsalmostnonexistent
Despiterisinginvalue,noalternativecurrencyorpaymentschemehasmadeinroadsintothetraditionalpaymentsecosystemorsetup
analternativeecosystem,especiallyastraditionalpaymentsolutionsarequicklybeingmodernized

SUPPORTINGEVIDENCE

Concernsaroundtheinherentinsecurityofalternativecurrencytransactionshaveonlybeenmagnifiedby
Security
Concerns anumberofnegativeshocks,includinghacks,freezesandtheiruseasatoolforcapitalflight,allofwhich
reducetrust

Lackof Alternativerailshavebeendifficultforregulatorstotrack/oversee,whichhasheldbackbuyinandthus
Central limitedadoptionrates.Ontheotherhand,traditionalrailreplacementtechnologieshavereceived
Oversight regulatorybuyin

RealTime CountriesaroundtheworldarefollowingtheleadoftheUnitedKingdom'sfasterpaymentssystemand
Becoming modernizingtheirdomesticpaymentssystemstomovetorealtime(orcloseto)processing,improvingthe
Reality valuepropositionoftraditionalpaymentschemescomparedtoalternatives

MoreToolsfor Newfeatures,suchasexpandeddatatransmissionandmessaging(ISO20022),transactiontrackingand
Traditional transparency,andflexibility(bothforaddonsandcrossborderconvenience)arebeingaddedto
Payments traditionalpaymentssystems,minimizingtheneedforanalternative

Introduction Findings A B C D E Uncertainties EndStates Conclusion 47

PAYMENTS| FINDINGE

Customeracceptanceofnontraditionalpaymentschemes(e.g.alternativecurrencies)
remainsalmostnonexistent(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

TransactionsperDay,April2017
(million)14,15
Expansionofrealtime
Bitcoinexchangehacks 4.2
systemforbusinesses

TheUnitedKingdom'sFasterPayments Concernsregardingthesecurityof
systemwasdevelopedtoallowmoney exchangesandwalletsarepervasive
transferstomovecheaplybetween amongusersofbitcoinandotherdigital
accountsinamatterofhours, currencies.In2016,Bitfinex,theworlds
0.35
considerablyfasterthanprevious secondlargestcoinexchange,was
solutions.Recently,thelimitfor hackedtothevalueofover$60million;
processinghasbeenraisedto250,000 torecover,allcustomersweresubject FasterPayments(UK) Bitcoin(Global)
forbusinesspayments,allowingthe toamorethan30%haircut.13
Popularityoftraditionalvsalternative
systemtohandlethevastmajorityof paymentssystems
businesstransactions.
KEYUNCERTAINTIES
Thetechnologybehindalternativepaymentschemesmaybeaddedtotraditionalschemes,butasignificantmarketshiftwouldneed tooccur
fortruepaymentalternativestogaintraction

1 Howwillregulatorsregulateand 2 Willdifferentpayment 3 Howwillbankscontinuetojustify

supportdigitalcurrency modernizationstandardsaffect highpaymentfeesoncemodern
developmentinthefuture? thedevelopmentofcrossborder systemsareimplemented?
solutions?

Sources:13.TheWallStreetJournal14.FasterPayments15.Blockchain.info

Introduction Findings A B C D E Uncertainties EndStates Conclusion 48

PAYMENTS| KEYUNCERTAINTIES

Uncertaintiesaroundpaymentslargelyconcernthemovetodigitalandonline,with
theeffectsofregionalizationalsoplayingarole

1 WHATWEKNOW Thefivepaymentfindingsillustratethemassivepressuresonthepaymentsindustry.Ontheonehand,heightened
competitionandachallengingregulatoryenvironmentareleadingtosteadilydecliningprofits.Ontheother,
customersarereluctanttoswitchtonontraditionalpaymentschemeswithoutseeingsignificantbenefits,thereby
limitingadoptionofnewtechnologies.

Throughthesefindings,thefollowingkeyuncertaintiesaboutthefutureofpaymentsemerged:
2 UNCERTAINTIES

Willthefutureof Whoisbest WillPSD2 Willmobile Whatwillthefirst

paymentsdiverge positionedto successfullycreate paymentsever nationaldigital
intotwoworlds benefitfromthe newpaymentsvalue captureamajor currencylooklike,
(retailandonline), monetizationof chainsinEurope? (doubledigit)share andhowfarawayis
orcantheybe paymentsdata? ofretailpaymentsin it?
bridged? cardbased
countries?

3 POSSIBLEFUTURES

Theresolutionofthesefivekeyuncertaintiespaintsthreediverging picturesofthefutureofthepaymentsindustry:

LossLeader TwoEcosystemsPostPSD2 IncreasingFragmentation

Introduction Findings Uncertainties EndStates Conclusion 49

PAYMENTS| POTENTIALENDSTATES

Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstateshave
verydifferentevolutionarypathsandimplicationsforallfirms

TWOECOSYSTEMS INCREASING
LOSSLEADER POSTPSD2 FRAGMENTATION

Thefirstendstatepaintsaworld Thesecondendstatepaintsa Thethirdendstatepaintsaworld

where: worldwhere:
Issuersfacelowerinterchange Banksdevelopopenpayment
revenues ApplicationProgramming
Interfaces(APIs)
Customersturntoalternatives
forrevolvingcredit Merchantsdeveloponline
paymenttoolsthatbypass
Customersareconditionedto
intermediaries
expectfreepayments
Theonlineandretailpayments
Paymentchoicesforcustomers
ecosystemdiverges
decline
Customersareentrenchedin
onlineecosystems
where:
Merchantsandintermediaries
createpersonalizedpayment
solutions
Customersadoptawide
varietyofpaymenttools
Aggregatedflowsofdata
becomedifficulttoacquire
Monetizationofdatabecomes
muchmoredifficult

Introduction Findings Uncertainties EndStates Conclusion 50

PAYMENTS| ENDSTATEONE

Aspaymentsmovefrombeingacashcowtoalossleader,marketleaders
lookfornewstrategies,andtherestlookforpartnerships

1 paymentprocessing
Incumbentcreditcard
issuerrevenuesdecline
precipitouslyasinterchange
shrinksandalternativesto
revolvingcreditgaineven
morepopularity
Additionally,the
developmentofnew Somemarketleaderssee
3 thisasanopportunityto
createnewrevenue
systemsallowsmuch
greatercustomeraccessto streamsviadata
realtimepayments,with monetization,oruse
theexpectationoflowfees paymentstolockcustomers
Manymarketincumbents
intoanecosystem
andnewchallengersadopt
apartnershipmodelfor
payments,seekingto
minimizelosseswhilestill
2 offeringbestofbrand 4
solutionstotheircustomers

CRITICALCONDITIONS
Theworldwidetrendofgovernmentslimitinginterchangeratesand
weakeningthepowerofhonourallcardsrulescontinues
Lowinterestratesandaneasymoneymonetarypolicymeans
thatalternativestorevolversremaineasilyavailabletomost
consumers
Realtimefasterpaymentssystemsaresuccessfullydeployedin
variouskeygeographiesaroundtheworld
EARLYSIGNS
Merchantspushbanksandcreditcardstooffermore(i.e.data
sharing)fortheirfees,andholdoutifnoagreementisreached
Banksstarttoreevaluatetheirrewardsandloyaltyofferingson
cards,offeringcustomersless
Banksstarttopartnerwithfintechsthatofferpaymentservices

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 51

PAYMENTS| ENDSTATEONE

Merchantsbenefitthemostfromthisworld,andcustomersmaybenefit,while
intermediarieswilllikelysufferthemost

Implications
ImplicationsforCustomers forIntermediaries
Fewerissuersmeansfewercreditcard Lessinterchangemeanslessprofitper
choices transaction
Theremainingchoicesoftenrepresent Intermediarieshavetheopportunityto
bettervalueformoney solutionswill gainmarketshareasbankswithdraw
increasinglybefreeofcharge frompaymentrelatedactivitiesin
favourofpartnerships
Whereallowedbylaw,datamaybe
sharedwithmultiplepartiesasan
alternativerevenuestream

LossLeader

ImplicationsforMerchants ImplicationsforCardIssuers

Morebargainingpowermeanslessfees Regulationsandtheappearanceof
paidtocardissuersandintermediaries alternativesmeanthatrevenues
associatedwiththeissuingofcardswill
Theopportunityexiststonegotiatefor
decline
moredata/otherbenefitsinreturnfor
fees Anopportunitytogainmarketshare
arisesassomecardissuerswillstop
issuingcards
Dataincreasesinimportanceasaprofit
driver

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 52

PAYMENTS| ENDSTATETWO

PostPSD2,theworldofonlineandretailpaymentscoulddiverge
significantly,creatingtwodistinctecosystems

Merchants(largeonline
onesinparticular)expand Customersfundamentally
1 theircurrentonlinesystems 3 moveawayfromcard
basedonlinepayment
toeasilytapintothose
APIs,movingtrafficaway schemes,whereaspointof
fromtraditionalcards salebehavioursareslower
toadapt,creatingtwo
Banksarerequiredto Largetechsdesigntheir distinctecosystems
developopenAPIsthat systems(e.g.ApplePay,
allowtrustedthirdparties AmazonOneClick)with
toeasilyandsecurely directbankconnections
builtin,andoffertheseto
accesscustomeraccounts 2 otheronlineretailersto 4
capturepaymentsdata

CRITICALCONDITIONS
HardPSD2orotherregulationsexistthatforcebankstodevelop
simple,secureandeffectiveAPIsopentothirdparties
LargetechsolutionsaredevelopedthateasilytieintotheseAPIsand
allowforsomeinformationsharing
Thecontinuedabsenceofacomprehensivedigitalidentityscheme
preventstheonlineecosystemfromeasilyintegratingwithretail
payments
EARLYSIGNS
BankscomplywithPSD2inEuropeontime,toEUspecifications
Partiesfromanytwoofthreegroups(merchants,banksandlarge
techs)formpartnershipstodevelopsolutionsthatalloweasy
consumeradoption
PostPSD2creditcardusageholdssteadyinretailstores

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 53

PAYMENTS| ENDSTATETWO

Theimplicationsforcustomersareunclear,butmerchantsbenefitgreatlyontheback
ofshrinkingprofitsforintermediaries

Implications
ImplicationsforCustomers forIntermediaries
Directconnectionswithbanksforonline Volumesandmarginsdeclineassome
purchasesmeanlessjustificationfor retailersandbanksbypasstraditional
creditcardfees intermediaries
Adoptionofonlinesolutionsmaymean Consolidationisthereforelikely,as
customersaremoredeeplyentrenched playersfightforalargershareofa
inlargetechecosystems smallerpoolofprofit
Lackofonlinebusinessforcesashiftof
focustoretailshoppingtoretainprofits
TwoEcosystems
PostPSD2

ImplicationsforMerchants ImplicationsforCardIssuers

Lessfeesarepaidtocardissuersand Useofrevolversmaydeclinesomewhat
intermediariesasmorecustomersuse ascustomerschargelesstothecard
directsolutions
Issuersmayallywithpartnerstopush
Theopportunityexiststochoose theuseoftheircreditcards,drivingup
partnershipswithissuers/intermediaries usage
ifbenefitsalign

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 54

PAYMENTS| ENDSTATETHREE

Insteadofconvergenceinpayments,thefieldofpaymentsmayfragmentas
merchants,intermediariesandschemesallseektodifferentiate

Asallsolutionsarebased
aroundcreditcardusage, Asaresult,data
1 customersfinditrelatively 3 aggregationand
monetizationschemes
easytojugglemultiple
differentpaymentappsand mostlyfailtogetoffthe
tools,andarerewarded ground,presentingbanks
withincentives withaquandaryregarding
Evenmorefintechand Marketincumbentsand paymentsrevenue
othernonbankpayment creditcardissuerscontinue
solutionsstartappearingin totaketheirshareof
themarketplace,further revenues,buthave
difficultypiecingtogethera
fragmentingthepayment
experienceforcustomers
2 customersspending 4
patterns

CRITICALCONDITIONS EARLYSIGNS
Retailers,bothinstoreandonline,continuetodevelopcustomized Thenumberofretailappsonatypicalcustomerssmartphone
paymentsolutionsandinvestinreward/loyaltyschemestoget continuestoincrease
customerstousethosesolutions
Creditcardusageonlinedoesnotdecline
BanksfailtobridgetheSKUleveldatagap
Nopredominantpaymentchannelappearsoutofthecompetitive
landscape

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 55

PAYMENTS| ENDSTATETHREE

Customersenjoyindividuallytailoredexperiencesbutmaylosetrackofspending,
whilebanksgainpowerastheytrackacustomersentirepaymentprofile

Implications
ImplicationsforCustomers forIntermediaries
Morebespokesolutionsleadto Creditcardfeescontinueorevenrise,
individuallytailoredpayment asmorecreditcardusagegetsbuiltinto
experiences apps
However,morefragmentationmaylead However,nascentdatamonetization
todifficultytrackingspendingdueto platformslargelyfailduetoalackof
manysourcesofpayments informationsharing
Asaresult,consolidationmayoccur,as
itisrequiredtocollect/makesenseof
Increasing customerdata
Fragmentation Ascustomersstruggletomanage
spendinghabits,toolsthatoffertracking
andadvicecouldthrive

ImplicationsforMerchants ImplicationsforCardIssuers

Tailoredpaymentexperienceswith Thebaseactofcardissuingdoesnot
loyaltyrewardsencourageappusage, largelydeclineinrevenue cards
andmayleadtomorecustomer continuetocompeteonrewards
adoption
Bankshavetheonlycompletepictureof
thecustomersspending,thusretaining
controloverdata

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 56

PAYMENTS| CONCLUSION

Keytakeawaysforfinancialinstitutions

DATAMONETIZATION
1
Newcompetitionandincreasedregulationwillcontinuetomakecorepaymentactivitieslessprofitable,
pushingpaymentproviderstofocusondatamonetizationasanimportantsourceofrevenue.Data
streamswillbesignificantlymorevaluablewheretheyaregranular(e.g.productleveldata)and
multidimensional(e.g.locationdata),makingdatacooperationandpartnershipscriticaltosuccessful
monetization

LOCALPAYMENTNEEDS
2
Insteadofdesigningpaymentsolutionsbasedontechnology,institutionswillfocusonhowtheir
customersprefertopay,anddesignpaymentsolutionsthatfittheircustomers'lives whichwillleadto
regionalsolutions.Furthermore,emergingcountrieswithoutamaturepaymentsecosystemwilllikelytake
theleadindevelopingpaymentsolutions

POWEROFLARGEMERCHANTS
3
Astheabilityoflargemerchantstoinfluencetheircustomers'paymentchoicesgrows(particularlyin
onlinetransactions),theirnegotiatingpowerwithinthepaymentsecosystemwillgrowaccordingly.
Combinedwiththeincreasedimportanceofproductlevelpaymentsdata,merchantswillbeabletowield
thispowertolowerfeesandinfluencethebroaderevolutionofpaymentsecosystems

Introduction Findings Uncertainties EndStates Conclusion 57

PAYMENTS| REFERENCES

References

1. EchoturnsupthevolumeonAmazonsambitionsasaudaciousbetspayoff.SliceIntelligence.Retrievedfromhttps://intelligence.slice.com/echoturns
volumeamazonsambitionsaudaciousbetspayoff/
2. Chinaretail,investmentandindustrialproductiongrowthsofteninApril.FinancialTimes. Retrievedfromhttps://www.ft.com/content/d9f71364e2bf345d
a4e9a61c9a9058a7?mhq5j=e3
3. Singles'Day:Alibabasmashesrecordsatworld'slargestonlineshoppingevent.CNBC.Retrievedfromhttp://www.cnbc.com/2016/11/11/singlesdaynews
alibabapoisedtosmashrecordsatworldslargestonlineshoppingevent.html
4. About10MillionMoreAmericansShoppedOnlineThanInStoresOverBlackFridayWeekend.Fortune.com.Retrievedfrom
http://fortune.com/2016/11/27/blackfridaynrfshopping/
5. StatisticaccordingtoLendingClub.com
6. Wheredoesmymoneygo?Interchangefeesexplained.Finder.com.au. Retrievedfromhttps://www.finder.com.au/wheredoesmymoneygointerchange
feesexplained
7. HowtheDemonetizationofIndianCurrencyHasLedtoIncreasedUseofMobileWallets.Technavio.Retrievedfromhttps://www.technavio.com/blog/how
demonetizationindiancurrencyhasledincreasedusemobilewallets
8. WorldwideEMVDeploymentStatistics.EMVCo.Retrievedfromhttps://www.emvco.com/about_emvco.aspx?id=202
9. ConsumerCashUsage:ACrossCountryComparisonwithPaymentDiarySurveyData.JohnBagnalletal,publishedinInternationalJournalofCentral
Banking.Retrievedfromhttp://www.ijcb.org/journal/ijcb16q4a1.pdf
10. ApplePayStats.PYMNTS.com.Retrievedfromhttp://www.pymnts.com/applepayadoption/
11. CurrentC retailersdefiantanswertoApplePay willdeactivateitsuseraccounts.ArsTechnica.Retrievedfrom
https://arstechnica.com/business/2016/06/currentcretailersdefiantanswertoapplepaywilldeactivateitsuseraccounts/
12. AlipayTakesOnApplePayAndPayPalOnTheirHomeTurf.Forbes.Retrievedfromhttps://www.forbes.com/sites/helenwang/2016/10/30/willalipay
dominateglobalmobilepayments/
13. BitcoinExchangetoSpreadLossesofHack.TheWallStreetJournal.Retrievedfromhttps://www.wsj.com/articles/bitfinextospreadlossesfromcybertheft
amongallusers1470559865
14. Statistics.FasterPayments.Retrievedfromhttp://www.fasterpayments.org.uk/aboutus/statistics
15. ConfirmedTransactionsPerDay.Blockchain.info. Retrievedfromhttps://blockchain.info/charts/ntransactions

Introduction Findings Uncertainties EndStates Conclusion 58

Section3.2
Insurance

WORLDECONOMICFORUM|2017 59
INSURANCE| INTRODUCTION

Insurancehasgreatlyevolvedinthelastseveralyears.Thissectionexaminesthe
keytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesignaledthestartofmajordisruptionininsurance,andtheglobalentryofseveralinnovative forceswiththe
potentialtodramaticallychangeitsfuture

CIRCA2015,THEMAJORFORCESIMPACTINGINSURANCEWERE

ValueChainPressure NewProductNeeds IncreasingConnectivity

Fromsalestoclaims,insurersfaced Newriskslinkedtochanging Insurersabilitytoconnectwithand

pressureonallsidesofthevalue lifestylesandtechnologymeant monitortheircustomersriskswas
chain newinsuranceproductneeds increasing

CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFINSURANCEWERE

Wouldthepressureson Wouldconnected Howwouldthe

Wouldinsuranceproducts
theinsurancevaluechain productsreachmass developmentoflife
changeduetochanging
continue,andwouldthey adoptionacrossalltypes insuranceevolveas
customerlifestyles?
leadtochanges? ofinsurance? growthmarketsshift?

Note:Forthepurposesofdistinguishingbetweenpropertyandcasualty(P&C)insuranceandlifeinsurance,allfindingsandpotentialendstateswill
specifytheirrelevantsector,oriftheyareequallyapplicabletobothsectors

Introduction Findings Uncertainties EndStates Conclusion 60

INSURANCE| OVERVIEWOFFINDINGS

Insurersarechallengedbytheriseof"insurtechs"andastructuraltransformation
oftheircustomerbase,forcingthemtoadopttonewtechnologiesmorequickly

WHEREDISRUPTIONOCCURRED

Increasedmodularityintheinsurancevaluechainisenablingnewcombinationsofplayersand
A
threateningthepositionofincumbents

Usagebased,ondemandandobjectspecificinsuranceproductsareemerginginresponsetoshifting
B customerlifestyles

Lifeinsurersfacepressuretoreinventtheirproductstrategiestomeettheneedsoftheirnext
C generationofcustomers

D Thedevelopmentofproductstoinsureemergingrisksisbecomingcriticaltocarrierprofitability,
particularlyasmarginsintraditionalproductserode

WHEREDISRUPTIONDIDNOTOCCUR

Connecteddevicesareproliferating,butinsurershavefailedtoconvincecustomersthatconnected
E insuranceservestheirinterests

Introduction Findings Uncertainties EndStates Conclusion 61

INSURANCE| FINDINGA

Increasedmodularityintheinsurancevaluechainisenablingnewcombinations
ofplayersandthreateningthepositionofincumbents(P&C/Life)
Ariseinthenumberofinsurtechs,coupledwithexternalforces,isdrivingthedisaggregationofinsurancevaluechains forcinginsurers
toadapttothenewworldbypartneringandinvestingininnovation

SUPPORTINGEVIDENCE

Changing Customersarepurchasinginsuranceinnewways.Somecustomersarechoosingdifferentchannels,such
Purchasing asonlineandmobile,whileothersarechangingtheirpurchaseoccasions,includingpurchasing
Patterns microinsuranceproductsasneededandpurchasinginsurancedirectlytiedtoaproduct

Thecontinueddevelopmentofselfdrivingcarsandthesharingeconomyhasstartedtoshiftthe
Shifting responsibilityofinsuranceawayfromtheinsurertobothdistributionplatformsandproduct
Underwriting
manufacturers(e.g.Uber,AirbnborTesla),creatingnewengagementmodelsforinsurersand
Responsibilities
necessitatingashiftininsuranceproductdesign

Theinsuranceindustryisovercapitalizedasawhole,leadingtolowerreturns.Thus,therecentgrowthof
noncatastropheinsurancelinkedsecurities(ILS),aswellaspartnershipsbetweenILSandrisk
Overcapitalization
underwriters/productdesigners,willleadtoadditionalreturndepression,forcingfirmstofindotherways
ofunlockingprofit

Withtheriseofexternalforces,insurersandreinsurersareincreasinglypartneringwithoutside
Riseof
organizations(suchasinsurtechsandlargetechfirms)toacquireexpertiseandhedgeagainstdisruption,
Partnerships
withoutriskingdirectproductcannibalizationbyinnovatinginternally

Introduction Findings A B C D E Uncertainties EndStates Conclusion 62

INSURANCE| FINDINGA

Increasedmodularityintheinsurancevaluechainisenablingnewcombinations
ofplayersandthreateningthepositionofincumbents(P&C/Life)(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

OutstandingCatBondand
ILSRiskCapital($M)3
30000
Partnershipwithinsurtech Lifetimeautoinsurance
25000
BoughtbyMany,aninsurtechfocused Teslahasquietlyrolledoutlifetime
20000
onusingthewebtomeetpreviously autoinsuranceforthemajorityofits
underservedaffinityneeds,recently carssoldinAsia.2 Theinsuranceis 15000
partneredwithMunichRetooffer providedbyathirdpartyinsurer 10000
insuranceproductsdirectly.Thisgives (variesbygeography),andthelifetime
5000
BoughtbyManythebalancesheetof costisincludedaspartofthevehicle
MunichReforsupport,andprovides priceatpointofsale.Teslabelieves 0
MunichReexposuretoproducts thatwithitsimprovingautopilotand 2005 2007 2009 2011 2013 2015
withoutatraditionalcarrier safetyfeatures,theriskprofileofits
Theriseofalternativecapitalininsurance
intermediary.1 carswillonlyimproveovertime.

KEYUNCERTAINTIES
Theriseofinsurtechandthetransformationaleffectoftechnologyshiftswillforceinsurerstoredefinetheirproductdesignand
distributionstrategy

1 Howwillinsurerschangeproduct 2 Howwillinsurersguardagainst 3 Towhatextentwillinsuranceget

designandpricinginaworld theerosionoftheirprofitability subsumedwithintheactual
wheretheysellthroughmultiple frominstitutionalmoney? productorservicebeing
channels? purchased?

Sources:1.FT2.Mashable3.SwissRe

Introduction Findings A B C D E Uncertainties EndStates Conclusion 63

INSURANCE| FINDINGB

Usagebased,ondemandandobjectspecificinsuranceproductsareemergingin
responsetoshiftingcustomerlifestyles(P&C)
Insurersaredesigningnewproductsaroundtheircustomerschangingneeds,especiallyaspeoplefromallwalksoflifechangetheir
workandconsumptionpatterns.However,questionsremainabouthowneedswillbemeasuredandrisksassessed

SUPPORTINGEVIDENCE

Thelinebetweentheconsumerandabusinessisblurring,withtheriseoftheprosumermeaningthat
Riseofthe
consumersneeddifferentcoveragesdependingonwhattheyredoing.Asaresult,insurersmustshift
Prosumer
theirdelineationbetweenpersonalandcommercialinsuranceinordertomeetcustomerneeds

Insurtechstartupsareofferingeversmallerslicesofinsuranceforindividualproducts(e.g.customers
MicroInsurance mobilephones),orforsmalleramountsoftimethatcustomerscanchoose(e.g.forapotentiallydelayed
flight).Thiswilltestthelimitsofinsuranceproductdesignandnecessitateondemandsales

Consumersaredemandingmodularityfortheirinsuranceindifferentlocations,fordifferentusecases
Adaptable (e.g.coverageforhighvalueitems),andfordifferentusagepatterns(e.g.coveragesthatcaneasilybe
Insurance turnedonandoff).Asaresult,incumbentswillhavetoadapttheironesizefitsallproductstoremain
competitive

Introduction Findings A B C D E Uncertainties EndStates Conclusion 64

INSURANCE| FINDINGB

Usagebased,ondemandandobjectspecificinsuranceproductsareemergingin
responsetoshiftingcustomerlifestyles(P&C)(continued)

CASESTUDIES QUANTITATIVEEVIDENCE
SizeoftheUKSharingEconomy
(billion)
7.4
+92%
Blurringlinesforall Servingtheprosumer

Thefastestgrowingsegmentofhosts Sliceisaninsurtechtargetingthegrey +87%

onAirbnbintheUnitedStatesare
seniors(102%yearoveryeargrowthvs
85%overall),and64%ofthemare
womenovertheageof60.4 Thegrowth
ofthissegmentsuggestscrosscultural
participationinthesharingeconomy,
andthesubsequentneedforinsurance
productstargetedtocustomers
individuallifestyles.
3.9
areabetweenconsumerandbusiness
insurance,inordertomeettheneedsof
2.1
theprosumer.5 Slicehascreateda
productwherehomesharersare
coveredontopofatraditional
homeownerspolicy,butatmuch 2013 2014 2015
cheaperpricesthanthosefora
commercialpolicy.
TransactionvaluegrowthoftheUKsharingeconomy6

KEYUNCERTAINTIES
Customerspurchasingbehaviours areinfluencedbytheblurredlinesbetweenworkandpersonaltime,andthesubsequentdemandfor
flexibilityandindividuality

1 Howwillinsurersbridgethegap 2 Microinsurancepresumesan 3 Howwilltherolloutofadaptable

betweenpersonaland increasedlevelofengagement insuranceimpactcustomerswho
commercialoperationswithin betweencustomersandthe previouslybenefittedfromnon
theiroperations? insurer docustomerswantthis? modularproducts?

Sources:4.Airbnb5.InsuranceJournal6.PwC

Introduction Findings A B C D E Uncertainties EndStates Conclusion 65

INSURANCE| FINDINGC

Lifeinsurersfacepressuretoreinventtheirproductstrategiestomeettheneedsof
theirnextgenerationofcustomers(Life)
Thelifeinsurancemarketisgrowingfastestinareaswherethepopulationismuchyoungerasawhole,whichleadstochanges in
productdemandsandcustomerpurchasingbehaviourthatinsurersmusttakeintoaccount

SUPPORTINGEVIDENCE

Emerging Thevastmajorityofgrowthinlifemarketsisinemergingmarkets,suchasSouthEastAsia,theMiddleEast
Markets orAfrica,andthoseyoungercustomersseektopurchasetermcoveragemorethanretirementrelated
Growth products

Inmanyemergingmarkets,thetraditionalagentnetworkisweakandthepopulationismuchmore
Comfortwith
investedindigital(includingmobile)technologies,asopposedtomaturemarketswheretraditionallife
DigitalChannels
insurancedependsoninpersoninteractionswithbothanagentandadoctor

Severalplatformsstartedin2017sellsimplelifeproductsonline,usingavailableinformationtobypassthe
RiseofDigital
medicalcheck;thisrepresentsthestartofashiftofrigid,fixedtermpoliciestowardsmoreflexible,
Distribution
consumablechunksforeasydigitalconsumption

Introduction Findings A B C D E Uncertainties EndStates Conclusion 66

INSURANCE| FINDINGC

Lifeinsurersfacepressuretoreinventtheirproductstrategiestomeettheneedsof
theirnextgenerationofcustomers(Life)(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

PopulationDistributioninthe
USvsVietnam,2016(%)9
Emergingmarketlifeinsurance Onlinebasedlifeproducts
Age40+ 47.8 35.1
Bimaisacompanydeliveringawide LadderandHavenLifeareUSinsurers
rangeofmobilehealthcoveragesto thathaverecentlystartedtooffer Age2039 27.2 34.6
customersintheemergingworld,using termlifeproductswithoutamedical
amodelwhereconsumerscanpayfor checkforthemajorityofapplicants.8 19.2 22.1
Age519
insuranceusingprepaidmobilecredit.7 Ladderisaninsurtechstartup,
Theystillrequireverificationbyan whereasHavenLifeisawhollyowned
Age04 6.1 8.2
agent,buttargetlowincomeindividuals subsidiaryofMassMutual.Asaresult,
(typicallynotatargetoflifeinsurance) theyrepresenttwopathsforthelife USA Veitnam
Vietnam
inseveralmarketsinAfrica. insuranceindustrytoofferdigital Differentdemographics,differentneeds
products.

KEYUNCERTAINTIES
LifeinsurancecompanieswillhavetoadoptP&Cinsurancetraits,suchasdigitalplatformsandautomatedprocesses omnichannel,simple
experienceswillbeadifferentiatingfactorincustomerdecisionmaking
1 Willemergingmarketpatterns 2 Howwillinsurersacquirethe 3 Howwilltraditionalinsurers
spilloverintodevelopedmarkets informationtheyneedtobypass managetheshifttosimplerterm
withatraditionalunderstanding themedicalcheck,andhowwill productsintheircorebusinesses,
oflifeinsurance? thisdifferbyregion? withoutcannibalization?

Sources:7.BusinessInsider8.NerdWallet9.PopulationPyramid.net

Introduction Findings A B C D E Uncertainties EndStates Conclusion 67

INSURANCE| FINDINGD

Thedevelopmentofproductstoinsureemergingrisksisbecomingcriticaltocarrier
profitability,particularlyasmarginsintraditionalproductserode (P&C)
Whileriskhomogenizationhaspushedmarginsdownfortraditionalinsurancecoverage,thisdeclineisbalancedbygrowthinemerging
markets,valueaddedconnectedservicesandnewproductstoaddressemergingrisks

SUPPORTINGEVIDENCE

P&Cinsurancepremiumsinthedevelopedworldhaveflatlinedordeclinedduetothehomogenizationof
GlobalMarket
risk.Thishasbeenoffsetbygrowthoftraditionalinsuranceproductsinemergingmarkets,where
asSeesaw
penetrationratesforinsuranceremainlow

Theinsurancemarketisstartingtobuildproductsthatprotectagainstemergingtechrelatedrisks,suchas
NewRisksEqual cyberinsurance,AIandselfdrivingcars.Cyberinsuranceisalreadya$2.5billionmarketintheUnited
NewProducts Statesandisprojectedtogrowquickly;thefinancialservicessectoritselfrepresentsasignificantdriverof
growthfortheseproducts

Inthecommerciallinesspace,insurersarestartingtoshifttoofferingproductsthatincludesensorbased
ChangeofRole coverage,whichreduceclaimsbymonitoringforchanges24/7.Theriseofconnectedinsuranceand
sensortechnologywillleadtoanincreasingshareofbusinessfocusedonprevention

Introduction Findings A B C D E Uncertainties EndStates Conclusion 68

INSURANCE| FINDINGD

Thedevelopmentofproductstoinsureemergingrisksisbecomingcriticaltocarrier
profitability,particularlyasmarginsintraditionalproductserode (P&C)(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

GrowthinTotalCyberInsurancelimits
PurchasedforMarshClients,Q1/201512
180
Jointcyberaggregationmodel 155%
Connectedmonitoringforchurches 160
140
GuyCarpenter,oneoftheworlds Acommercialinsurancecompany
120 100%
largestreinsurers,recentlyestablished recentlylaunchedaproductwith 100
apartnershipwithSymantectocreatea ChurchMutualtoprotectchurches 80
cyberaggregationmodel.10 Guy againstfrozenpipeleaks(churches 60 42%
Carpenterishopingthatbypartnering 33%
areespeciallyvulnerableduetolow 40
withSymantec,itwillbeabletomodel occupancy).Theinitialpilotsaved 20
extremecybereventsmoreaccurately customerscloseto$1millionin 0
Communication, Financial Power
anddeliverbetterpricingandrisk claims,andtheproducthasbeen Media&Technology Education
Institution &Utilities
managementforitscustomers. rolledoutinover1,500churches Fastandbroadgrowthofcyberinsurance
acrosstheUnitedStates.11 products

KEYUNCERTAINTIES
Whiletraditionalproductsremainprofitableinemergingmarkets,findingnewsourcesofrevenuesisincreasinglyimportantinthedevelopedworld

1 Howlongwillemergingmarkets 2 Willtheriseofinsurance 3 Withtheshifttoprevention,

beabletogrowrapidly,andhow premiumsonnewrisksandin insurerswillmoveintoareas
doesthattimelinecontrastwith newmarketsbalanceouttheloss currentlyoccupiedbylargetechs
thehomogenizationofrisk? oftraditionalrisksandmarkets? howwillthisaffectpartnerships?

Sources:10.InsuranceJournal11.YahooFinance12.RiskManagementMonitor/MarshAnalysis

Introduction Findings A B C D E Uncertainties EndStates Conclusion 69

INSURANCE| FINDINGE

Connecteddevicesareproliferating,butinsurershavefailedtoconvincecustomers
thatconnectedinsuranceservestheirinterests (P&C/Life)
Thenumberofconnectionsbetweentheconsumerandtheinsurerhasrisen,butconsumersdonotfeelcomfortablevolunteeringtheir
informationasinsurershavenotconvincedthecustomerofthebenefitsofconnectedness

SUPPORTINGEVIDENCE

Astheamountofdatafromconnectedinsurancerises,regulatorybodieshavestartedtomandate
CustomerData
consumerdataprotectionpolicies,whichputcontrolofdatainthecustomer'shands.Moreover,
Ownership
regulatorsinsomelocalesareworkingdirectlywithcompaniesinordertoensuredatasecurity

TheRiseof Traditionally,insuranceproductshaveworkedonafixedtimebasis,wherethepricewouldbedirectly
TimeMeasured linkedtothecustomer'sriskprofile.Astechnologyadvances,connectedinsuranceproductscanmeasure
Insurance bothariskandatimevariable,makingmoretargetedandaccuratepricingpossible

Tosimplifytheprocessofconnectedinsuranceandtoreachouttosometimeshesitantconsumers,
Easeof
insurerscanworkwithproductmanufacturerstobuildtheconnectionintotheproduct.Inmostinstances,
Connection
however,thatconnectionrequirescustomeragreement

WithincreasinguseofvirtualassistantsbyAmazon,GoogleandMicrosoft,andassuchassistantscollect
Roleof
moreinformationabouttheirowners,theymaybecomeavirtualinsuranceagentforhouseholds.
Assistants
However,insurerswouldhavetobuildrelationshipswithlargetechfirmstousethosechannelseffectively

Introduction Findings A B C D E Uncertainties EndStates Conclusion 70

INSURANCE| FINDINGE

Connecteddevicesareproliferating,butinsurershavefailedtoconvincecustomers
thatconnectedinsuranceservestheirinterests (P&C/Life)(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

DeploymentofIntegratedvsTethered
(StandAlone)Telematics(inmillion
vehicles)15
Lifestylerewards Integratedtelematics 150
TheJohnHancockVitalityprogramme AtLibertyMutual,customerscan
rewardscustomerswithpremium receiveafreeNestProtectsmoke 100
savingsandretaildiscountsforlivinga detectoranddiscountedinsurance
50
healthylifestyle.Customershavethe premiumsuponinstallationand
choicetooptintotheprogramme, verification.14 NestnotifiesLiberty 0
earningvitalitypointsbytracking Mutualofthedevicesbatterylevels 2010 2013 2016 2019 2022 2025
daily,healthrelatedactivities. andworkingsensors noadditional
Customersbenefitbecausetheyreceive Integrated Tethered
effortrequired.Customerssavejust
savingsbygoingabouttheirdaily byhavingarequiredhomesafety
Riseofintegratedtelematicsvsoptintelematics
activities nolifestylechange device,makingadoptionpainfree.
required.13
KEYUNCERTAINTIES
Beforecustomersarewillingtoadoptconnectedproducts,adequatedatasharingagreementsandpremiumincentivesneedtobeinplace

1 Howwillinsurerscometogether 2 Whatwillbetheimpactoftime 3 Howwillthedevelopmentof

tobuildstandardsarounddata basedinsuranceontheperunit assistantsaroundclosed
sharing,andhowwillthose priceofinsurance? ecosystems(Siri,Alexa)impact
standardsdifferinternationally? thepurchaseofinsurance?

Sources:13.JohnHancock14.Nest15.EY

Introduction Findings A B C D E Uncertainties EndStates Conclusion 71

INSURANCE| KEYUNCERTAINTIES

Theresolutionoftheseuncertaintieswillshapethefuturedevelopmentofinsurance
andtherolesofinsurers

1 WHATWEKNOW Theinsurancefindingsillustratethescaleofthechallengesfacinginsurers.Thevaluechainisunderenormous
pressure,andchangesinpurchasingpatternsareforcinginsurerstomoveawayfromthetraditionalonesizefitsall
modeltowardsaflexible,customizablerangeofproducts.Atthesametime,insurersmustchangefrombeingreactive
tobeingproactive,withtheriseofconnectedinsuranceandtheneedtomonitorcustomerriskonanongoingbasis.

Throughthesefindings,thefollowingkeyuncertaintiesaroundthefutureofinsuranceemerged:

2 UNCERTAINTIES

Howwillthe Willtheindustrybe Docustomerswant Howwillinsurers Willincreasing

insurance abletodevelop toengagewiththeir matchtheirlife integrationanda
consumptionmodel guidelinesforthe insurermoreoften productstofitthe focusonprevention
changeasthe useofdata,and (aswouldbeneeded differentconditions leadtosuccessfor
sourcesandnature howwillthose formicroinsurance)? inemerging connected
ofliabilitychangesin guidelinesdiffer markets? products?
thefuture? aroundtheworld?

3 POSSIBLEFUTURES

Theresolutionofthesefivekeyuncertaintiespaintsfourdivergingpicturesofthefutureoftheinsuranceindustry:

ChallengingtheChannel UnderwritingbyMachine

RiseoftheFlexibleProduct EZLifeInsurance

Introduction Findings Uncertainties EndStates Conclusion 72

INSURANCE| POTENTIALENDSTATES

Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms

UNDERWRITING RISEOFTHE
CHANGINGTHECHANNEL BYMACHINE FLEXIBLEPRODUCT EZLIFEINSURANCE

Thefirstendstatepaintsaworld Thesecondendstatepaintsa Thethirdendstatepaintsaworld Thefourthendstatepaintsa

where:
Insurersimprovetheir
customerfacingdigital
experiences
Insurancebecomesincreasingly
integratedwithproducts
Consumersbenefitfrom
productstailoredtotheir
needs
Advertisingformindshare
decreasesinimportance
worldwhere:
Underwritingbecomes
increasinglycomplicated,
strengtheningtheroleofAI
Thirdpartyunderwriting(forAI
expertise)becomesthe
industrystandard
Twodivergingpathsare
createdforcustomers
Insurersfaceabattleto
differentiatethemselves
where: worldwhere:
Prosumersforceinsurersto Insurersdevelopdigital
connectbusinessandpersonal channelsforproduct
insurance distribution
Insurersusetechnologyto Termproductsrisein
enabletimeflexibility popularityasdemographics
shift
Insurersengagewith
consumerstomonitor Lifeinsurersdeprioritizeagents
coverage andinvestments
Customersmaybecaughtoff Lifeinsurersthusincreasingly
guardbyinconsistentcoverage resembleP&Cfirms

Introduction Findings Uncertainties EndStates Conclusion 73

INSURANCE| ENDSTATEONE

Ascustomerpurchasingpatternsstarttoshift,insurersemphasize
benefits,digitalchannelsandintegrationatpointofsale(P&C)

Incumbentinsurersarethus
1 forcedtochangetheir 3 Customersfocusmuch
productstoallowformore lessonmindsharewhen
customization,andbuild makingapurchase,
purchaseprocessesthatare insteadselecting
Insurtechs(backedby Bothincumbentsand
bothsimpleand productsthatbestfit
reinsurers)capturea insurtechsalsoseekto
customizable theirworkandlifestyle
noticeableshareofthe capturecustomersatthe
propertyandcasualty pointofsale,focusingon
insurancemarketbyfocusing partnershipswithproduct
onbenefitstotheir
customersandbyoffering 2 makersanddistributorsby
integratinginsuranceinto
4
superioronboardingand products
claimsprocesses

CRITICALCONDITIONS EARLYSIGNS
Digitalchannelsforpurchasecontinuetoriseinpopularity,led AvarietyofinsurtechsthatofferdifferenttypesofP&Cinsurance
especiallybyinsurtechs appear,drivingcompetition
Amajorityofcustomersovercomeapathytoconsiderswitching Incumbentsstartofferingmodularproductsonmorelinesof
insuranceprovidersmoreactively business
Significantdemandexistsforinsurancetiedtospecificproducts

Introduction Findings Uncertainties EndStates 1 2 3 4 Conclusion 74

INSURANCE| ENDSTATEONE

Asaresult,productdesignandmarketingwillshiftconsiderably,andcustomers
willbenefitfromhavingproductsmoretiedtotheirneeds

Implicationsfor
IncumbentInsurers ImplicationsforInsurtechs

Insurtechswillsetcustomer Themainstreamingofinsurtechs
expectationsondigitalpurchaseand focusedoncustomerspecific
claimsexperiences experienceswillbenefitcustomer
Tieinswithproductscreate choice,butmayforcetheinsurtechs
opportunitiesforlucrativepartnerships intoniches
forleadinginsurersinthisarea Mainstreamingwillalsoattractwilling
Asproductsbecometargetedto partnersandcreateopportunitiesto
customerneeds,usingadvertisingto whitelabelproducts
securemindsharewillbecomeless Changingthe
importanttocustomeracquisition Channel

ImplicationsforRegulators ImplicationsforCustomers

Theriseofinsurancetiedtoproduct Customerswillbenefitfromproducts
salescompelsregulatorstoanswer tailoredtotheirneeds
questionsaboutwhetherexclusive Customerswhoareheavyusersand
partnershipsaregoodforcustomers thusbenefitfromonesizefitsall
insurancemayhavetopaymore

Introduction Findings Uncertainties EndStates 1 2 3 4 Conclusion 75

INSURANCE| ENDSTATETWO

InsurersfindithardtokeepupwithrapiddevelopmentsinAI,andthus
outsourceunderwriting,causingabifurcationofthemarket(P&C)

Tomanagethetechnology,
1 insurerspartnerwitha
wideselectionofvendors
3 Alternatively,someinsurers
seektopursuespecialized
fortheirexpertisein
slicesofthemarket,
underwritinganalytics,
Theamountof Asunderwritingbecomes offeringaffinityproducts
effectivelyoutsourcing
technological outsourced,itlosesits thatappealtoanarrow
underwriting
sophisticationneededto valueasadifferentiator, rangeofconsumers
runaninsurance andinsurersfocuson
companyrisesas differentiatingthemselves
algorithmstakeover basedoncustomer
underwriting 2 serviceandscale 4

CRITICALCONDITIONS EARLYSIGNS
AIdevelopmentinunderwritingadvancessignificantly Insurersstartcuttingstaffinunderwritingdepartmentsasthey
outsource/dependonvendors
InsurersworkwithB2Bvendors/utilitiesinsteadofinhouse,
especiallytodriveadvancementsinunderwriting Insurersstartofferingaffinitypolicies

Introduction Findings Uncertainties EndStates 1 2 3 4 Conclusion 76

INSURANCE| ENDSTATETWO

Customersbenefit,butnewentrants(especiallyaffinityplayers)maysufferfromlack
ofscale;inaddition,insurershavetofindnewwaystodifferentiatethemselves

Implicationsfor
IncumbentInsurers ImplicationsforInsurtechs
Distributionandscalearemore Insurtechscateringtoaffinitycustomers
importantthanever,increasingthe facecompetitionfrominsurersthat
likelihoodofconsolidation seektospecialize
Poolingofrisksceasestoexistaspricing Someinsurtechsmayevolvetobecome
sophisticationleadstoindividualized, B2Bunderwritingandclaimsprocessing
riskbasedpricing providers
Nonscaleincumbentsmustfindwaysof
differentiatingthemselves
Underwritingby
Machine

ImplicationsforRegulators ImplicationsforCustomers

Theexternalizationofunderwriting Customerseitherbenefitbypayingless
couldmeanfewermodelstomonitor, orbybeingservedbetterunderan
butitalsocreatestheriskofasingle affinity
pointoffailure

Introduction Findings Uncertainties EndStates 1 2 3 4 Conclusion 77

INSURANCE| ENDSTATETHREE

Theriseofinsurancethatcoverschangesinbehaviour,roleandriskprofile
overtimemeansinsurersmustsolvehowtomonitorproducts(P&C,Life)

1 prosumersmeansthat
Consumersinsuranceneeds
arebecomingmorespecific
astheirjobsandactivities
drivefrequentchangesto
theirriskprofileand
coverageneeds
Theriseofparttimersand
insurershavetointroduce
flexiblecoverage,forcing
themtoconnecttheir
businessandpersonallines
2 4
Asaresult,insurers
3 introducetimeflexibleand
eventdrivenpolicies,
engagingwithcustomersto
findthebestwaystocontrol
Theriseofproductspecific
wheninsurancecoverageis
insurance(e.g.forabikeor
turnedonandoff
phone)alsomeansthat
insurershavetobesmarter
aboutmeasuringand
trackingproductusage

CRITICALCONDITIONS
Theshifttowardsselfemploymentcontinuesaroundtheworld
Connectedproductsthatallowmonitoringofturnon,turnoff
insurancegrowinpopularity
EARLYSIGNS
Insurersstartenteringintopartnershipsoracquisitionswith
prosumerfocusedinsurtechs
Insurersandgigeconomyfirmslaunchpartnershipstocover
workers
Insurersworktobuildincoverageforinternetenabledproducts

Introduction Findings Uncertainties EndStates 1 2 3 4 Conclusion 78

INSURANCE| ENDSTATETHREE

Incumbentsandinsurtechswouldhavetoinvestintrackinganddigitalsolutions
toprotectagainstcustomermistakesthatleadtomiscoverage

Implicationsfor
IncumbentInsurers ImplicationsforInsurtechs

Theincreaseinmonitoringsignalsa Theriseofflexibleinsurancemeansthat
fundamentalshiftintheroleofinsurers insurtechsspecializinginprosumersor
fromrisktransfertoriskmonitoringand connectedproductswillhavemany
management partnershipopportunities
Turnon,turnoffinsurancemeans Insurtechswillhavetocarefully
insurerswillhavetoinvestinmonitoring measureclaimsratesforfraud
technologies detection

Riseofthe
FlexibleProduct

ImplicationsforRegulators ImplicationsforCustomers

Usingconnectedtoolsformonitoring Customerswillbenefitfromflexible
customerswillcreatenewdata insuranceproductsthatcanbemodified
concernsforregulatorsfocusedon tosuittheirneeds
consumerprotection
Insurancethatcanbeturnedonandoff
mayleadcustomerstostrugglewith
inadvertentcoveragegaps

Introduction Findings Uncertainties EndStates 1 2 3 4 Conclusion 79

INSURANCE| ENDSTATEFOUR

Demographicsandmarketmaturitymeanemergingmarketswillprovide
thebulkoflifeinsurancegrowth,anddigitaldistributioniskey(Life)

1 growthinthesemarkets
Growthinlifeinsurance
comesfromyounger
customerbasesinemerging
marketsthathavedifferent
needsandafamiliaritywith
digitalchannels
However,currentmodelsof
revolvearoundhiringmore
agentstosellontheground,
addingtocostsandmissing
anopportunitytodeploy
digitaltools
2 4
3 Theriseoftermproducts
meansinsurersalsofocus
moreondigitalchannelsof
distribution,whichaligns
Leadinginsurersshifttheir
withshoppingpatternsin
focusawayfromretirement
manyemergingmarkets
toshortterm,increasingly
flexibleproducts,matching
theneedsofpeoplein
emergingmarkets

CRITICALCONDITIONS EARLYSIGNS
IncreasingdemandforlifeinsuranceinAfrica,SouthEastAsiaand Insurtechspushincumbentsbyofferingdigitallifeinsurance
SouthAmericadriveslifeinsurersprofits productsinkeylocales
Thelackofknowledgeaboutcomplicatedlifeinsuranceproducts Agloballifeinsurerundergoesmajorrestructuring(i.e.de
persists emphasizingagents)inkeylocales
Currentdemographicpatternscontinue "Simpletermproductsbecomeincreasinglypopular

Introduction Findings Uncertainties EndStates 1 2 3 4 Conclusion 80

INSURANCE| ENDSTATEFOUR

Insurersthatcanofferdigitaldistributionwithoutcompromisingunderwriting
standtocapturemarketshare,andprovidecustomerswithadditionalcoverage

Implicationsfor
IncumbentInsurers ImplicationsforInsurtechs

Theshifttotermproductsanddigital Insurtechswillhaveacompetitive
distributionmeanslifeinsurerswillstart advantageinemergingmarketsdueto
lookingmuchlikeP&Cinsurersintheir theirlocalnature,andcouldrepresent
structure goodtargetsforacquisition
Thisshiftwillfosterindustry Theycanbeausefultoolforspreading
consolidationascompaniesseekscale innovationsbetweenborders,either
todriveprofitsfromlowermarginterm organicallyorwithapartner'shelp
products

EZLifeinsurance

ImplicationsforRegulators ImplicationsforCustomers

Theriseofdigitalchannelsmaymeana Customerswillbenefitfromproducts
moreattractivetargetfordatatheft thatbettersuittheiragedemographic
regulatorswillhavetoensureadequate (e.g.termlifeproducts)
dataprotection

Introduction Findings Uncertainties EndStates 1 2 3 4 Conclusion 81

INSURANCE| CONCLUSION

Keytakeawaysforfinancialinstitutions

VALUECHAINSHIFT
1
Oncetightlyverticallyintegrated,theinsurancevaluechainisrapidlybeingmodularizedbynew
technologiesthatallowforsplittingactivitiesacrossmanydifferentplayers.Leadingorganizationsare
usingthismodularitytotheiradvantage,pursingflexiblepartnershipsthatallowthemtoaggressively
competeforadjacentprofitpools

COMPLEXPRODUCTS,SIMPLYDISTRIBUTED
2
Toremaincompetitive,insurersneedtosimultaneouslyachievetwoseeminglycontradictoryobjectives:
ontheonehand,theymustdevelopcomplexandhighlypersonalizedproductstomeetcustomersneeds;
ontheother,theywillneedtosignificantlysimplifytheoriginationprocess,enablingevenhighlycomplex
productstobesolddirectlythroughonlineandmobilechannels

CONNECTIONSCHANGINGTHEINSURER
3
Connectedinsurancewillfundamentallychangethewayinsurersoperate,shiftingtheirfocusfromrisk
assessmenttoriskpreventionandcreatingtheimperativetoworkwithoriginalequipmentmanufacturers
tobuildinconnections.Toachievethis,however,insurersmustovercomeexistingperceptionsof
connectedinsuranceproducts,convincingcustomersthattheyrepresentanimprovementovercurrent
products

Introduction Findings Uncertainties EndStates Conclusion 82

INSURANCE| REFERENCES

References
1. BoughtbyManyexpandsnicheinsurancerole.FT.Retrievedfromhttps://www.ft.com/content/a0d04746d9bc11e6944be7eb37a6aa8e?mhq5j=e3
2. Teslaissosureitscarsaresafethatitnowoffersinsuranceforlife.Mashable. Retrievedfromhttp://mashable.com/2017/02/23/elonmuskteslalifetime
insurance/#uYPLmBieTkq3
3. InsuranceLinkedSecuritiesmarketupdate:VolumeXXVI,February2017.SwissRe.Retrievedfrom
http://www.swissre.com/library/ILS_market_update_February_2017.html
4. AirbnbsGrowingCommunityof60+WomenHosts.Airbnb.Retrievedfromhttps://www.airbnbaction.com/wp
content/uploads/2016/03/Airbnb_60_Plus_Women_Report.pdf
5. SliceLabsTestingPayPerUseInsuranceAppwithRideshareDrivers.InsuranceJournal.Retrievedfrom
http://www.insurancejournal.com/news/national/2017/04/03/446575.htm
6. Thesharingeconomygrowsup:HowtheUKhasembracedthesharingeconomy.PwC. Retrievedfrom
https://www.pwc.co.uk/issues/megatrends/collisions/sharingeconomy/outlookforthesharingeconomyintheuk2016.html
7. ThisSwedishstartupbringsinsuranceto24millionpeopleinthedevelopingworldthroughtheirmobiles.BusinessInsider.Retrievedfrom
http://www.businessinsider.com/bimabringsmicroinsurancetoafricaasiaandlatinamericaviaphones201610
8. WheretoFindOnlineInstantApprovalTermLifeInsurance.NerdWallet.Retrievedfromhttps://www.nerdwallet.com/blog/insurance/instantlifeinsurance/
9. RetrievedfromPopulationPyramid.net.
10. CarpenterFormsPartnershipwithSymantectoCreateCyberAggregationModel.InsuranceJournal.Retrievedfrom
http://www.insurancejournal.com/news/international/2016/05/18/409001.htm
11. ChurchMutualrecognizedasaCelentModelInsurerinInnovationandEmergingTechnologies.YahooFinance.Retrievedfromhttps://finance.yahoo.com/news/church
mutualrecognizedcelentmodel190000478.html
12. CyberInsurancePurchasingUp,ButBreachesFeltinPricesandLimits.RiskManagementMonitor fromMarshanalysis.Retrievedfrom:
http://www.riskmanagementmonitor.com/cyberinsurancepurchasingupbutbreachesfeltinpricesandlimits/
13. TheJohnHancockVitalityProgram.JohnHancock.Retrievedfrom:https://www.jhrewardslife.com/howitworks.html
14. StaysafeandsavemoneywithNestandLiberty Mutual.Nest.Retrievedhttps://nest.com/insurancepartners/libertymutual/
15. Thequestfortelematics4.0:Creatingsustainablevaluepropositionsforconnectedcar.EY. Retrievedfrom
http://www.ey.com/Publication/vwLUAssets/Key_telematics_considerations_for_the_telecoms_sector/$FILE/The_quest_for_telematics_EF0120.pdf

Introduction Findings Uncertainties EndStates Conclusion 83

Section3.3
DigitalBanking

WORLDECONOMICFORUM|2017 84
DIGITALBANKING|INTRODUCTION

Digitalbankinghasgreatlyevolvedinthelastseveralyears.Thissectionexamines
thekeytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawthestartofashiftindigitalbanking,withtheentryofseveralnewforcesthatchangedthe onlineand
mobilebankingecosystemandhadthepotentialtochangethewaycustomersbank

CIRCA2015,THEMAJORFORCESIMPACTINGDIGITALBANKINGWERE

VirtualBanks MobileChannels BankingPlatforms

Virtualbanksimprovedtheir Allbanksdevelopedmobile Banksbegantousetechnology

offeringstodifferentiatethemselves channels,thoughincumbents toenablethirdparty
fromincumbents oftenstruggled applications

CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFDIGITALBANKINGWERE

Howwouldthe
Howwouldbanksbe
Wouldvirtualbanksbe emergenceofbanking
abletodeploydigital
abletocapturemarket platformsaffect
solutionswithlegacy
sharefromincumbents? developmentsindigital
architecture?
banking?

Introduction Findings Uncertainties EndStates Conclusion 85

DIGITALBANKING| OVERVIEWOFFINDINGS

Bankingisonthecuspofsignificantdisruptionasregulationsandtechnology
begintolaythefoundationsofafundamentalshiftinthebusinessmodel

WHEREDIDDISRUPTIONOCCUR?

A Traditionalbankdistributionmodelsandeconomicsareatriskofbeingdeeplydisruptedbythedrive
towardsplatformmodelsofbanking

Banksnolongerdefinecustomerexpectationsofthebankingexperience;instead,fintechsandlarge
B technologycompaniessetthestandard

Incumbentsarestartingtomigratecoresystemstothecloud,aslegacyinfrastructurecreates
C challengesinmeetingcustomerneeds

WHEREHASDISRUPTIONNOTOCCURRED?

Fewcustomershavemovedawayfromtraditionaldepositaccountsdespitesignificanteffortsfrom
D
onlineandmobilechallengerbanks

Introduction Findings Uncertainties EndStates Conclusion 86

DIGITALBANKING| FINDINGA

Traditionalbankdistributionmodelsandeconomicsareatriskofbeingdeeply
disruptedbythedrivetowardsplatformmodelsofbanking
Catalysedbyregulatorsanddrivenbyadesiretomoreefficientlysatisfycustomerneeds,platformbankingbusinessmodels where
banksofferconnectionswithotherfirmsinadditiontotheirown aregainingmomentum

SUPPORTINGEVIDENCE

APIs,assoftwareintermediariesthatallowprogrammestoconnectandinteract,provideexposurespecific
Increasing
Technology functionalitywhileprotectingtherestoftheapplication.Thistechnology,whichhasachievedbroad
Capacity adoptioninrecentyears,allowsbankstoseamlesslyintegratewiththirdpartiesandisnecessaryfor
developingplatformmodelsofbanking

Regulatorsinanumberofjurisdictionshavebegunmandatingthatbankssharedataandaccesswiththird
Increasing partyorganizationsviaopenAPIs.Theseopenbankingstandards,suchasPSD2inEurope,areexpectedto
Regulatory
weakenbankscontrolovercustomerdataandallowcustomersmuchgreatercontroloverthirdparty
Pressure
accesstotheiraccounts

Marginsonbankingproductsaredecliningduetoincreasedcompetition,loweringtheprofitabilityof
Shrinking
Margins productmanufacturing.Thisincentivizesbankstorefocusondistributionandseekpartnershipswith
specializedproductandserviceproviders ineffect,creatingplatformsfortheircustomers

CAVEATS

Platformbankingbusinessmodelsarenascent,andlittleisunderstoodaboutwhatthemodeland
Uncertain economicswillultimatelylooklike.Theuncertaintyhasdiscouragedincumbentsandfinancialservices
Economics softwareprovidersfrominvestinginplatformbankingsolutions,particularlyastheincrementalscale
requiredtooffsetpotentialcannibalizationisunclear

Introduction Findings A B C D Uncertainties EndStates Conclusion 87

DIGITALBANKING| FINDINGA

Traditionalbankdistributionmodelsandeconomicsareatriskofbeingdeeply
disruptedbythedrivetowardsplatformmodelsofbanking(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

Curatedplatformnewentrant
AGermandigitalonlybank,N26has
clearlyidentifieditsusercentreddigital
experienceasitskeydifferentiator.The
bankengagesbestofbreed
providers,fromAllianzto
TransferWise,1 toofferproductsthat
N26itselfdoesnotfocuson,thus
creatingahighlycuratedplatform.
TotalNumberofPubliclyAvailableAPIson
theProgrammableWebDirectory3
16000
Openplatformincumbent 14000
12000
CrditAgricole,Europesthirdlargest 10000
bankbyassets,providesanappstorefor 8000
itscustomerstodownloadawiderange 6000
offunctionalitieswhichcomplement 4000
coreproducts.Todothis,thebank 2000
exposesitsAPItoallexternaldevelopers 0
andcultivatesacommunitythat
encouragescustomerstosuggestideas.2
RiseofAPIsinfinancialservices

KEYUNCERTAINTIES
Thedegreeofplatformopennesswilldependonhowmanyregulatorsenforceopenbankingstandardsandhowstronglytheydoso

1 Willothergovernmentspass 2 Willtherebeahardorsoft 3 Absentregulatorypressures,how

regulationsrequiringtheopen enforcementofPSD2? stronglywillbanksseektocurate
sharingofdata? theirplatformofferings?

Sources:1.TheInvestmentObserver2.AmericanBanker3.NordicsAPIs

Introduction Findings A B C D Uncertainties EndStates Conclusion 88

DIGITALBANKING| FINDINGB

Banksnolongerdefinecustomerexpectationsofthebankingexperience;
instead,fintechsandlargetechnologycompaniessetthestandard
Experienceswithnonincumbentsareraisingthebarforbanks,ascustomersexpectmorevaluedriven,personalizedandseamless
servicethaneverbefore.Incumbentbanks,focusedonrecapitalizingtheirpostcrisisbalancesheets,areplayingcatchup

SUPPORTINGEVIDENCE

ClientComfortwith Customersuseofdigitalchannelsforbankinghasrisen,asadoptionofsmartphonesandotherinternet
DigitalChannels enableddevicesincreasesworldwide.Customersarealsobecomingmoretrustingofdigitalchannelswhen
conductingmonetarytransactions,asillustratedbytheglobalriseofonlineshopping

Experiences Customersnowdemandthesameimmediateaccess,frictionlessexperienceandlowfeeorfreeofferings
withNon fromtheirmobilebankingappsastheyreceivefromUber,Starbucksandotherleadingmobile
FinancialFirms applications,forcingbankstolearnlessonsfromoutsidethebankingecosystem

Asrevenuesplateau,incumbentbankshavesoughttolowertheircostsbyeliminatinginpersonservices,
RealWorld drivingcustomerstolowercostchannelsandjettisoningunprofitablecustomersegments.Theseefforts,
CostCutting whilenecessarytomaintainprofitability,havemeantthatbankshavehadtolearnalternativemethodsof
customerengagementwherevertheycan,includingfromfintechsandlargetechnologyfirms

Introduction Findings A B C D Uncertainties EndStates Conclusion 89

DIGITALBANKING| FINDINGB

Banksnolongerdefinecustomerexpectationsofthebankingexperience;
instead,fintechsandlargetechnologycompaniessetthestandard(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

ShareofMostCommonBankingChannels(US)6

Online
Bank/fintechtradeoffdeal SimpledigitalP2Ppayments 40% 37%
48%
JPMorganandWellsFargorecently FintechfirmVenmoallowsusersto
signedagreementswithIntuitthatwill makeP2Ppaymentsatnocost,and
givethelattereasyaccesstobanking sharetheirtransactionswithintheir 10% 26% 32%
Mobile
customersdatainexchangefornew socialnetwork.Ithasbeensosuccessful
limitsonhowIntuitusesthedata.The (transferringover$5billioninthelast 26%
ATM
bankshaveindicatedtheywantthe threemonthsof2016)thatmajorUS 24%
22%
agreementtobeamodelforcontracts bankshavelaunchedZelle,acompetitor 3% CallCentre
3% 2%
13% Branch
withothertechfirms,asthefightfor offeringfreepaymenttransfersand 8% 7%
datamonetizationrampsup.4 linksdirectlywithbankaccounts,inthe 2013 2014 2015
hopeoftakingbackmarketshare.5
Dominanceofdigitalchannels
KEYUNCERTAINTIES
Banksareinvestingheavilyindirectdigitalsalesandservicechannelstolowertheircostsandbettermeetcustomerexpectations

1 Howwillcustomerpreferencesof 2 How,ifatall,willlargetechfirms 3 Howwillthemovetodigital

distributionchannelsevolve? moveintothedigitalbanking impacttheattractivenessofmass
area? andmassaffluentclients?

Sources:4.TheNewYorkTimes5.TheVerge6.TheBostonConsultingGroup

Introduction Findings A B C D Uncertainties EndStates Conclusion 90

DIGITALBANKING| FINDINGC

Incumbentsarestartingtomigratecoresystemstothecloud,aslegacy
infrastructurecreateschallengesinmeetingcustomerneeds
Bankshaveundertakensignificanteffortstomovetoanewer,cloudbasedarchitecture,butstillstrugglewithlegacyinfrastructurethat
weighsdownprofitsandlimitsbanksabilitytomeetcustomerneeds

SUPPORTINGEVIDENCE

Coretechnologicalsystemsoffinancialinstitutionsarelargelybuiltondecadesoldinfrastructure(using
Infrastructure extinctlanguages,e.g.COBOL)andareriddledwithinefficiencies.Asaresult,manyincumbentsare
Issues investingin"integrationlayers"tobridgetheneedsofclientfacingsystemswiththeircoresystem.While
theselayershaveprovenvaluable,banksarealsoawareoftheneedtomigrateawayfromlegacycores

Startupsareabletobeginwiththeclientexperienceandbuildaninfrastructurespeciallydesignedforthe
Patchwork client.Incontrast,incumbentfinancialinstitutionsmustoftenbuildadhocsolutionstomeetspecific
Solutions needs,providingashorttermsolutionbutaddingtothecomplexityofsubsequentchangesandthe
eventualmodernizationoftheirsystems

Incumbentfinancialinstitutionsareshiftingawayfromstrategiestoripandreplacelegacysystems
GradualShiftto towardsagradualmigrationoffunctionstothecloud,inordertoimproveflexibilityandreducecosts.
Modernization However,theprocessofmigratingawayfromlegacysystemswilltakeyearsandlargeamountsofcapital,
andmaypromptreliabilityissues

Introduction Findings A B C D Uncertainties EndStates Conclusion 91

DIGITALBANKING| FINDINGC

Incumbentsarestartingtomigratecoresystemstothecloud,aslegacy
infrastructurecreateschallengesinmeetingcustomerneeds(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

B2Bfintechfocused
oninfrastructure
MXprovidesmodern,externalsolutions
toincumbentsfordatacollection,
enrichment,analysisandmoney
managementtools.MXpartneredwith
BBVAtodevelopBBVAsCompass
FinancialTools,7asuiteoffinancial
managementandaccountaggregation
tools.
BankITSpendinUSbyFocus
(%)
Migrationtothecloud 22
CapitalOnehasbeenaleaderin
migratingitscoresystemstothecloud.
Itadoptedacloudbasedinfrastructure
approachforallnewapplicationsby
2015,andinrecentyearshasbeen
78
focusedonmigratingitscoresystemsto
Maintenance Improvements
AmazonsAWSplatform,withtheaim
ofcuttingover50%ofitsdatacentres Maintenanceofcoreinformationtechnology
by2018.8 (IT)systemsinfinancialinstitutions
represents78%ofallITspending9

KEYUNCERTAINTIES
Defininganoveralllongtermdigitalstrategyrequiresincumbentstocreatecompatibilityandefficiencyfromthefronttoback end

1 Willtheshifttocloudbased 2 Howwilltheshifttonew 3 Willinfrastructurestrategiesof

infrastructurecreate infrastructureaffectdataand financialinstitutionsbecome
opportunitiesforanewdata privacyconcerns? moredivergentinthelongrun?
strategy?

Sources:7.PRNewswire8.AmazonWebServices9.TheFinancialBrand

Introduction Findings A B C D Uncertainties EndStates Conclusion 92

DIGITALBANKING| FINDINGD

Fewcustomershavemovedawayfromtraditionaldepositaccountsdespite
significanteffortsfromonlineandmobilechallengerbanks
Anumberofthesebankshaveappearedinrecentyears;however,thesechallengerbankshavelargelyfailedtogainmarketshare,
especiallywithmoreprofitablecustomersegments

SUPPORTINGEVIDENCE

Customerspreferencesarequicklyshiftingtodigitalchannels,butphysicalbranchesremainacritical
Valueof componentofthebankingexperience.Manycustomershavebankingneedswhichonlyphysicallocations
Physical
cancurrentlyfulfill(e.g.gettingasamedaywiretransferforahomepurchase),whileothercustomers
Presence
preferachannelbasedonhumaninteraction

Becausechallengerbanksareunabletomeetmorecomplexneeds,theytendtobeusedassecondary
PoorChallenger bankaccountsbymostcustomers,causingthemtoloseoutonalargeshareofrevenue.Also,toattract
BankEconomics customers,theyoftenprovideeitherlowerfeesorhigherreturnsondepositsthanincumbents,bothof
whichlowerprofitability

Incumbents Theprofitabilityofmanycustomersegmentsdeclinedfollowingthefinancialcrisis,aswealthlevelsfell
Targeting andinterestratesapproachedzero.Inresponse,incumbentsrefocusedtheireffortsonoptimizingtheir
Attractive
clientbase retainingtheirmostprofitablecustomersegments,andensuringthatonlylessprofitable
Customers
customerswouldbetemptedtoswitchtochallengerbanks

Veryfewtechnologicalbarrierstoentryaffectthedevelopmentofanonlineormobilechallengerbank
Abilityto (themajorityofthebarriersconcernregulation).Thus,ifcustomerdefectionstochallengerbanks
FastFollow accelerate,incumbentscanquicklyfollowwithvisuallyappealingfrontendofferingsoranonlinebankof
theirown

Introduction Findings A B C D Uncertainties EndStates Conclusion 93

DIGITALBANKING| FINDINGD

Fewcustomershavemovedawayfromtraditionaldepositaccountsdespite
significanteffortsfromonlineandmobilechallengerbanks(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

5 AverageNumberofRoutineBranchInteractions
(perrespondent)12
4
Minirobobranch Guidetodigitalbanking
BankofAmericarecentlytestedthe SantandersnewWalkOutWorking 3
ideaofautomatedbranchesbyopening (WOW)initiativeallowscustomerswho
2
threeminibankbranchesthathave openanaccountataSantanderbranch
ATMsandvideoconferencing,butno tosetuptheirdigitalbankingtoolson 1
employees.InadditiontotheATMs,the site.11 Bankemployeesensurethat
newrobobanks calledautomated clientsmobileandonlineaccountsare 0
centres allowcustomerstomakea fullyactivatedandaccessibleonthe 2012 2013 2014 2015 2016
videoconferencecalltoaBankof firstday,sotheycanwalkout
US Canada UK Australia Netherlands
Americaemployeeatanother workingandarenottemptedto
location.10 switch. Useofbranchesisdeclining butslowly

KEYUNCERTAINTIES
Incumbentsarestartingtoembracetheneweraofdigitizationwhilebuildingontheircorecompetitiveadvantages

1 Willplatformbankingaid 2 Howcandigitalonlybanks 3 Astechnologydecreasesthecost

challengerbanksintheirbattleto overcometheirlackofphysical ofservingclients,willbanksbegin
becomeprimaryinstitutions? locations? toretargetlessdesirableclients?

Sources:10.TheWashingtonPost11.PRNewswire12.Bain&Company

Introduction Findings A B C D Uncertainties EndStates Conclusion 94

DIGITALBANKING| KEYUNCERTAINTIES

Thefutureofdigitalbankingwillbeimpactedbytheunravellingofuncertainties
aroundregulation,increasingdigitizationandthebehaviouroftechnologygiants

1 WHATWEKNOW Fintechsarenowsettingthelevelofexpectationsthatcustomershaveforbanks.Withtheemergenceofplatform
bankingmodels,banksaretryingtoevolve,butareweigheddownbylegacysystems.However,thoughfintechsmay
offersuperiordigitalexperiences,consumershaveyettoshiftawayfromincumbentbankstoonlineandmobile
challengerbanks.

Throughthesefindings,thefollowinguncertaintiesarounddigitalbankingemerged:
2 UNCERTAINTIES

WillPSD2beagame Willcustomer Whatarethe Howcanincumbent Whatpartnerswill

changerforthe interestinopen businessmodelsfor bankstransfertheir bankschoosetoset
industryinEurope? bankingmodels largetech competitive outtheirlongterm
continueinlightof companies advantagestothe digitalstrategy?
growing expandinginto digitalworld?
cyberinsecurity? banking?

3 POSSIBLEFUTURES

Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureofthedigitalbanking
industry:

Controlled,CuratedPlatforms TechAggregationPlatforms OpenPlatformWorld

Introduction Findings Uncertainties EndStates Conclusion 95

DIGITALBANKING| POTENTIALENDSTATES

Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms

CONTROLLED, TECHAGGREGATION OPEN

CURATEDPLATFORMS PLATFORMS PLATFORMWORLD

Thefirstendstatepaintsaworld Thesecondendstatepaintsa Thethirdendstatepaintsaworld

where: worldwhere: where:
Banksoutsourceproduct Largetechfirmscreate Legislationorcustomer
designforlessprofitable distributionplatforms pressureforcesbankstouse
products openAPIs
Fintechsandsmallerbanks
Banksformcollectionsofbest extendpartnershipswithlarge ThirdpartiesuseAPIsto
ofbreedproductsfromvarious techfirms developtheirownproducts
sources
Customersembracetheability Newentrantsdirectlycompete
Customersbenefitfromdiverse topurchasefromlargetech withtraditionalbankproducts
andcustomizedofferings firms
Financialinstitutionschooseto
Fintechsfocusonwhitelabel Incumbentsareforcedto focusonsinglesegmentsofthe
andcobrandedproducts decidewhethertojointech valuechain
platformsorstayisolated

Introduction Findings Uncertainties EndStates Conclusion 96

DIGITALBANKING| ENDSTATEONE

Asbanksfocusoncostcutting,theystartembracingcontrolled,curated
platformsasacosteffectivewayofofferingservices

1 Tofilltheresultinggap,
Asbanksfacemargin
pressures,theymakethe
decisiontocutless
profitableproductsand
servicesinordertofocuson
differentiatedofferings
3 Customersbenefitfrom
banksapproachfintechs accesstobestofbreed
andotherserviceproviders offeringswithouthavingto
toformpartnershipsbased switchbanks,butlackthe
Overtime,banksforma
onproducts choicetheywouldhavein
small,highlycurated
anopenplatform
ecosystemofproductsand
services basedon
partnershipswithother
organizations whichthey
2 canthenoffertheir 4
customers

CRITICALCONDITIONS EARLYSIGNS
Banksarenotforcedtodevelopopendatasolutionsbyregulators Banksformproductlevelpartnershipswithfintechstousethe
bankasaplatform
Banksmakethedecisiontoofferoutsideproductstotheir
customersinsteadofbuildinginhouse Opendataregulationsarenotbroadlyadoptedorareweakly
enforced
Productdesignersarewillingtomakepartnershipswithbanksfor
greateraccesstocustomers

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 97

DIGITALBANKING| ENDSTATEONE

Controlled,curatedplatformsgivemuchgreaterpowertothecurator,atthe
expenseofcustomerchoice

ImplicationsforBanks ImplicationsforRegulators

Banksgettochoosetheareasof Regulatorsmustcloselyconsiderthe
bankingtheywanttospecializein,and marketpowerofplatformownersto
canofferotherfeaturestotheir ensuretheyarenotusingtheirposition
customersviapartnerships todistortmarketforces
Bankswillneedtoensurethattheyand Regulatorsmustalsotrackthespreadof
theirpartners,whetherplatformsor customerdatabetweenplatform
manufacturers,provideaunified ownersandproductmanufacturersto
experienceforcustomers ensurethedataishandledandstored
properly
Controlled,Curated
Platforms

ImplicationsforCustomers ImplicationsforFintechs

Customersbenefitfrombestofbreed Fintechscanpartnerwithbanksto
products,buthavelesschoicethanin extendtheirreach,butloseouton
otherplatformendstates controloverdistribution
Customersfacehigherswitchingcosts Fintechscanalsousepartnershipsto
betweenproductecosystems broadentheirsuiteofofferingsand
competedirectlywithbanksmore
effectively

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 98

DIGITALBANKING| ENDSTATETWO

Asfintechsandbanksseekpartnerstooptimizetheirvaluechain,large
techfirmsstarthostingsignificantdistributionplatforms

Seeingthepopularityof
Fintechsandsmallerbanks theseplatforms,large
1 (especiallythosethatfocus 3 bankshaveadifficult
onniches)formdistribution choicetomake:giveup
partnershipswithtech theirexclusivedistribution
Customers,alreadyusedto
platforms,allowingthose networksandjoin,orrisk
Largetechfirmsenterthe interactingwiththetech
bankstomaximizetheir missingoutonagrowing
digitalbankingsectornotas firm,embracethose
potentialcustomerbase setofcustomers
productowners,butas aggregationplatforms,
productdistributorsusing makingthemabestof
theirpreexistingplatform breedandmoreagile
2 alternativetothe
traditionalfullservice
4
bankingmodel

CRITICALCONDITIONS EARLYSIGNS
Bigtechplayerschoosetoenterthedistributionsideoffinancial Largetechplayersmoveupstreamfrominfrastructuretoproviding
services software
Bigtechplayersarenotplaguedbyamajorscandalordatabreach, Moreregulatorysandboxesbegintodevelopandallowfirmslike
andremaintrustworthytoengagewith Facebooktooperateinthefinancialarea
Regulatorsacceptamoreoligopolisticdistributionoffinancial Techfirms(e.g.Facebook)begintooffersimplefinancialservices
servicesproductsbytechfirms products,backedbyoneortwopartners

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 99

DIGITALBANKING| ENDSTATETWO

Largetechsexpandintothefinancialservicesarea,intensifyingtheircustomer
relationshipsandchallengingregulatorsinpreservingcompetition

ImplicationsforCustomers ImplicationsforBanks

Buyingfinancialproductsfromthetech Bankswouldfacearetailcompetitor
providerofchoiceincreasesconvenience withpotentiallybroaderreachand
forcustomers moreresources,meaningtheywould
havetofindcompetitiveadvantages
Astheaggregationplatformsrepresenta
shelfofcrossentityproducts, Productsandservicespreviously
comparabilityand,thus,productquality bundledunderthebankingumbrella
maydecrease wouldbecomeunbundled,withonlythe
regulatedpiecesstayingwiththebank

TechAggregation
Platforms

ImplicationsforRegulators ImplicationsforLargeTechFirms

Asthedominanceoflargetechfirms Largetechfirmswouldsignificantly
extendsintofinance,regulatorsneedto increasetheiraccesstocustomerdata
considertheriskofmarketdominance sets
evenmorestrongly

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 100

DIGITALBANKING| ENDSTATETHREE

Pressuresforceanopenenvironment,increasingcompetitionand
compellingincumbentinstitutionstofocusonthemostvaluablesegments

1 thirdpartiescancompete
Banksareforcedtodevelop
andsellonopenplatforms
asaresultofopenbanking
regulation,orasconsumers
movetolargetech
platforms
Forthefirsttime,many
directlyagainstbanksona
levelplayingfield,
deployingproductsonthe
sameplatformsas
banksdo
2 4
3 choosetobecomea
Customersloyaltytoa
productproviderfallsas
theyshifttothebanking
productthatsuitsthem,
aidedbytheplatforms
guidance
Financialinstitutionsmust
platformoperatoror
productmanufacturer,as
owningtheentirebanking
experiencefromproductto
distributionbecomes
difficult

CRITICALCONDITIONS EARLYSIGNS
Regulationsforcethedevelopmentofopenplatforms;newly Regulatorspushbackagainsttheformationofclosed,curated
createdopenplatformsgainenoughcustomersupporttoforce platforms
incumbentstoparticipate
Customersflocktothedevelopmentofopendistribution
Banksdevelopdigitalidentitysolutionsandconsistentlydeliver platforms,perhapscreatedbylargetechfirms
them
Fintechsappearthatareonlyfocusedonproductdesign
Customersembraceplatformbanking,overcomingtheirstickiness
tooneprovider

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 101

DIGITALBANKING| ENDSTATETHREE

Powerdynamicsareshiftingduetoamorefragmentedvaluechain,ascustomers
arebenefittingsignificantlyfromincreasingcompetition

ImplicationsforBanks ImplicationsforRegulators

Bankswouldbepushedtodecidewhat Aslegislationsopenuptheplayingfield,
roletheywantedtoplayinthevalue regulatorsneedtoclarifyregulations
chain:productdistributororplatform for,andgrowcomfortablewith,a
manager materiallydifferentbusinessmodel
Bankswouldlosetheabilitytocross Theshifttoopenplatformsraisesthe
subsidizeanyoftheirproductsandthus questionofwhoisliable the
wouldhavetoensureprofitability,product distributorortheproductowner
byproduct
Openplatformswouldmeanthatbrand
imagebecomesevenmoreimportantthan
before,andbankswouldhavean
advantage OpenPlatform
World
ImplicationsforCustomers ImplicationsforNewEntrants

Asthemarketbecomesmore Openplatformsallowfintechstobypass
competitiveandclientcentric, theproblemofscale,asplatformscan
customerswouldbethemain provideaccesstomanycustomers
beneficiaries
Newentrantswithoutstrongbranding
However,customersmaybeconfused mustfindwaysfortheirproductsto
andoverwhelmedbythechoiceof standout
products

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 102

DIGITALBANKING |CONCLUSION

Keytakeawaysforfinancialinstitutions

DISTRIBUTORSORMANUFACTURERS?
1
Theriseofproductplatformsindigitalbankingwillforcemarketparticipantstomakeachoicebetweena
strategicfocusonproductdistribution(i.e.becomingtheplatform)orafocusonproductmanufacturing.
Thischoicewillhavefarreachingimplicationsfortheirbusinessesandcustomerinteractionmodels,as
wellasfortheircompetitivelandscape

FEWER,BIGGERWINNERS
2
Theadvantageofbeingthemarketleaderwillincreasesignificantlyforbothproductmanufacturersand
productdistributors.Platformswilloffercustomersimprovedtransparencyintoproducts,significantly
increasingtheadvantageforthebestproducts.Fordistributors,significanteconomiesofscaleinaccessto
dataandcustomerawarenesswillfeedavirtuouscycleofgrowth

ECOSYSTEMIMPERATIVES
3
Underallpossibleendstates,digitalbankinginstitutionswillforgemorerelationshipswithotherfinancial
servicesand,increasingly,nonfinancialservicesfirms meaningthatwithinthedigitalbanking
ecosystem,aproficiencyforestablishingpartnershipsandawillingnesstocreatewinwin,symbiotic
relationshipswillleadtomorepartners

Introduction Findings Uncertainties EndStates Conclusion 103

DIGITALBANKING |REFERENCES

References

1. EuropeanchallengerbankN26:thefutureoffinancialservices.TheInvestmentObserver.Retrievedfrom
https://www.theinvestmentobserver.co.uk/tech/2017/05/11/europeanchallengerbankn26390hoia2/
2. OpenAPIforBankApps:CanCreditAgricole'sModelWorkHere?.AmericanBanker. Retrievedfromhttps://www.americanbanker.com/news/openapiforbankapps
cancreditagricolesmodelworkhere
3. TrackingtheGrowthoftheAPIEconomy.NordicsAPIs.Retrievedfromhttp://nordicapis.com/trackingthegrowthoftheapieconomy/
4. BanksandTechFirmsBattleOverSomethingAkintoGold:YourData".TheNewYorkTimes.Retrievedfrom
https://www.nytimes.com/2017/03/23/business/dealbook/banksandtechfirmsbattleoversomethingakintogoldyourdata.html?_r=0
5. ThebiggestUSbanksarelaunchingtheirown,fasterVenmo.TheVerge.Retrievedfromhttps://www.theverge.com/2017/6/12/15782328/zelleusbanksinstant
paymentprocessingappvenmosquarecash
6. RetailBankOperationalandDigitalLeadersReaptheRewards.TheBostonConsultingGroup.Retrievedfrom
https://www.bcgperspectives.com/content/articles/financialinstitutionstechnologydigitalretailbankoperationaldigitalleadersreaprewards/
7. BBVACompassranksintopgroupin2016JavelinOnlineBankingLeaderawards".PRNewswire.Retrievedfromhttp://www.prnewswire.com/newsreleases/bbva
compassranksintopgroupin2016javelinonlinebankingleaderawards300364391.html
8. CapitalOnesCloudJourneyThroughtheStagesofAdoption.StephenOrban,atAmazonWebServices.Retrievedfromhttps://medium.com/awsenterprise
collection/capitalonescloudjourneythroughthestagesofadoptionbb0895d7772c
9. CoreBankingSystems:TheIndustrysAchillesHeel.TheFinancialBrand.Retrievedfromhttps://thefinancialbrand.com/58786/corebankinglegacysystemsmarketing/
10. Banktellersarethenextblacksmiths.TheWashingtonPost.Retrievedfromhttps://www.washingtonpost.com/business/economy/banktellersarethenext
blacksmiths/2017/02/08/fdf78618ee1c11e696626eedf1627882_story.html?utm_term=.60a9e8ce7881
11. SantanderBankEmpowersNewCustomersWithTheWOWFactor.PRNewswire.Retrievedfromhttp://www.prnewswire.com/newsreleases/santanderbank
empowersnewcustomerswiththewowfactor300463961.html
12. CustomerLoyaltyinRetailBanking:GlobalEdition2016.Bain&Company.Retrievedfromhttp://www.bain.com/publications/articles/customerloyaltyinretailbanking
2016.aspx

Introduction Findings Uncertainties EndStates Conclusion 104

Section3.4
Lending

WORLDECONOMICFORUM|2017 105
LENDING| INTRODUCTION

Lendinghasgreatlyevolvedinthelastseveralyears.Thissectionexaminesthe
keytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawrapiddevelopmentsinlending,withtheentryofseveralnewforcesthatthreatenedtochangethe
lendinglandscapeandthefuturecentresofpower

CIRCA2015,THEMAJORFORCESIMPACTINGLENDINGWERE

LeanandAutomated
MassP2PLending AlternativeAdjudication
Processes

P2Pservicesweregrowingquickly, Newwaystomeasureandtrackcredit Automationwastransforming

reachingasignificantnumberof worthinesswerebeingdeveloped adjudicationandloanorigination
customersacrosstheglobe

CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFLENDINGWERE

Howwouldlowcreditor
Wouldincumbent WouldP2Plendingbe
thinfilecustomers
lendersreactto abletogrowand
aroundtheworld
fintechsspeedand competewith
benefitfromalternative
digitalprowess? traditionalbanks?
adjudication?

Introduction Findings Uncertainties EndStates Conclusion 106

LENDING| OVERVIEWOFFINDINGS

Newentrantsaresignificantlydisruptingthelendingmarket,butdonotappear
poisedtobringinnovationstoscale

WHEREDIDDISRUPTIONOCCUR?

Newadjudicationtechniqueshavesignificantlyexpandedaccesstocreditforunderbanked,"thinfile"
A andsubprimecustomers

Individualandsmallbusinessborrowersexpecttheirlendertodelivertheseamlessdigitalorigination
B andrapidadjudicationpioneeredbyleadingfintechs

Nonfinancialplatformsareemergingasanimportantsourceofunderwritingdataandapointof
C
distributionforcredit

WHEREHASDISRUPTIONNOTOCCURRED?

Fundingeconomicsputmarketplacelendersatacostdisadvantagecomparedtotraditionalbanks,
D raisingquestionsaboutthemodel'ssustainability

Introduction Findings Uncertainties EndStates Conclusion 107

LENDING| FINDINGA

Newadjudicationtechniqueshavesignificantlyexpandedaccesstocreditfor
underbanked,"thinfile"andsubprimecustomers
Newdataandanalyticaltechniqueshaveprovenvaluableinadjudicatingcredit,especiallyforthinfilecustomerswithinsufficient
creditbureauhistorytoqualifyformostloans,drivingarapidexpansionofcredittounderservedmarkets

SUPPORTINGEVIDENCE

Newsourcesofdatahaveemergedforuseinadjudicatingcredit,suchassocialandmobiledatafor
NewSources individuals,andpaymentsoraccountingdataforbusinesses.Whilethisdatahashadlimitedeffectiveness
ofData inimprovingtheunderwritingofestablishedcustomers,ithasproventobevaluableforthinfile
borrowers(withinsufficientcreditbureauhistory)andsmallbusinesses

Incumbentlendersarelookingtotheirexistingstoresofdatatobolstertheirunderwritingmodels,
UsingData especiallyforunderbankedcustomers.However,thatdataisoftenunstructuredandsiloed,makingit
More
difficulttobeputtouse.Toaddressthesechallenges,incumbentsareinvestingheavilyindata
Effectively
transformation,automationandnewanalytics

Newentrantsimproveontheircreditmodelsusingshortiterationcycles,whileincumbentsare
MoreAgile constrainedtomakingadjustmentsmuchmoreslowly.Thislaginimplementingbestinclass
CreditModels methodologiesprovidesnewentrantsatemporarycompetitiveadvantageinunderstandingthecreditrisk
ofunderbankedandthinfilecustomers,especiallyasnewsourcesofdatabecomeavailable

CAVEATS

Whilecreditmodelshaveimprovedsincethefinancialcrisis,manyalternativeapproachesweredeveloped
Lackof
followingthecrisis,makingitunclearhowalternativemodelsforsubprimecustomerswillfareoverthe
CreditCycles
fulllifeofthenextmacrocreditcycle

Introduction Findings A B C D Uncertainties EndStates Conclusion 108

LENDING| FINDINGA

Newadjudicationtechniqueshavesignificantlyexpandedaccesstocreditfor
underbanked,"thinfile"andsubprimecustomers(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

ApprovalRatesofUSSmallBusinessLenders,
2016(%ofapplications)2
70% 63.3%
59.2%
Paydayloanalternative Artificialintelligenceforunderwriting 60%
48.8%
50% 41.1%
LendUp,aUSdirectonlinelenderand ZestFinanceprovidesmachinelearning 40%
financialeducationcompany,offersa underwritingtechnologytofinancial
30% 23.7%
proprietaryunderwritingmodelto institutionsthatassistswithanalysing
20%
servesubprimeborrowerswholost andprocessingcomplex,disparatedata
10%
accesstocreditfollowingthefinancial toimprovepricingdecisions.Following
0%
crisis.Thecompanyoffersloansat aninvestmentfromChineseinternet BigBanks CreditUnions SmallBanks Alternative Institutional
searchgiantBaiduin2016,itis Lenders
lowerratesthanpaydaylendersand
progressivelylowerratesasborrowers developingacreditscoringplatformfor
repay. Chineseborrowers,basedonBaidus Increasedlendingtosmallbusinessesthrough
searchdata.1 alternativelenders

KEYUNCERTAINTIES
Newcreditadjudicationtechniqueshaveproventobeeffective,demonstratingstrongapprovalandlossrates

1 Howwillnewcreditadjudication 2 Whatnewsourcesofdatawill 3 Whatnewtechniquesand

methodologiesperformduringa provetobethemostvaluableto sourcesofdatawillregulators
severecreditcontraction? creditdecisions,andwhowill deemappropriatetouse?
ownthedata?

Sources:1.YahooFinance2.Deloitte

Introduction Findings A B C D Uncertainties EndStates Conclusion 109

LENDING| FINDINGB

Individualandsmallbusinessborrowersexpecttheirlendertodelivertheseamless
digitaloriginationandrapidadjudicationpioneeredbyleadingfintechs
Newfintechsabilitytodeliverfasterandlessonerousapplicationprocessesisplacingpressureonincumbentstodeliversimilarly
streamlinedexperiences

SUPPORTINGEVIDENCE

Newonlinelendershavecutloanadjudicationtimestominutes,forcingincumbentlenderstoimprove
Improved andautomateinternalloanprocessesinordertocompete.Asaresult,manyloanprocessesthat
Processes previouslyneededhumaninterventionarenowautoadjudicated,allowingincumbentstoofferdigital
originationandrapidloanorigination

Legacy Constrainedbydecadesoldmainframes,incumbentsmustaddtechnologicalbridgestoconnectlegacy
Technology infrastructurewiththedigitalfrontendsdemandedbycustomers.Thisadditionaleffortincreases
IncreasingCosts developmenttimeandcostscomparedtofintechs,butisnecessaryforincumbentstocompete

Improvingprocessesandbuildingmiddlewarehavebothproventoberelativelyexpensive.Incumbents
Partnershipsas
havethuslookedatpartnershipswithmarketplacelenders,allowingthemtoaccessfintechdriven
CostSaver
technologicalsolutionswithoutfullyoverhaulingtheirinfrastructure

Introduction Findings A B C D Uncertainties EndStates Conclusion 110

LENDING| FINDINGB

Individualandsmallbusinessborrowersexpecttheirlendertodelivertheseamless
digitaloriginationandrapidadjudicationpioneeredbyleadingfintechs(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

AverageNetPromoterScorebyLender5

80

Fully digital mortgage process Fintechbankpartnership

60
QuickenLoans,anincumbentlender, JPMorganpartneredwithonline
nowoffersRocketMortgage,afully lenderOnDecktoimproveitsloan 40

digitalhomeloanoriginationservice originationtothebanksroughly4
20
whereuserscanviewtheircredit millionsmallbusinesscustomers.The
reportsonline;digitallyverifyasset, partnership,anditsnearterm 5
propertyandincomeinformation;and profitability,hasdrivenOnDeckto
Marketplace Credit Community Regional National
receivefullapprovalinminutes.Rocket reorientitsstrategytofocuson lenders unions banks banks banks
Mortgageusesalgorithmstoanalysea deliveringahighlyscalableOnDeck
borrowerscreditworthiness,reducing asaServicemodel.4
Superiorcustomersatisfactionfrom
latencyandhumanerrors.3
marketplacelenders
KEYUNCERTAINTIES
Newdistributionchannelsandmoredemandingcustomerexpectationsareraisingthebarforincumbentlenders,necessitatingsignificant
investment

1 Towhatdegreewillplatform 2 Willincumbentsbeableto 3 Howwillborrowerpreferences

lendingmodelsproliferate? addresstheirlegacysystem fordistributionchannelscontinue
withoutmateriallyimpedingtheir toevolve?
competitiveness?

Sources:3.Money4.TheWallStreetJournal5.EY

Introduction Findings A B C D Uncertainties EndStates Conclusion 111

LENDING| FINDINGC

Nonfinancialplatformsareemergingasanimportantsourceofunderwriting
dataandapointofdistributionforcredit
Newdistributionchannelsarebeingcreatedasfinancialinstitutionsembedlendingproductsintothirdpartyonlineplatforms.Asthey
seektocapturecustomersinmomentsofneed,nonfinancialinstitutionsarealsojumpingintothefray

SUPPORTINGEVIDENCE

Increasing Lendersaretargetingnonfinancialplatformsbecausetheyprovideaccesstotheexactmomentswhen
Customer customersneedcreditthemost,suchasduringsupplychainmanagementorthesettlementofaccounts
Engagement receivable.Thus,lenderscanpreemptivelyunderwriteloansatdecisionmoments

Lendersarealsoturningtononfinancialplatformsasdistributionchannelpartnersbecauseofthe
IncreasingData particulardatasetsmanyoftheseplatformshold.Thisdatacanprovidevaluableforwardlookinginsights
Collection intoacompanysperformance,aswellasenabledetailedcomparisonsbetweensimilarbusinessesand
individuals.Assuch,thisdatahelpstolowerbothunderwritingriskandthecostofunderwriting

Nonfinancialplatformshavealsobeguntheirownexplorationintoprovidinglendingproductsdirectlyto
RiskofNew theirusersasanewlineofbusiness.Whethertheseloansarefundeddirectlyfromtheplatformsbalance
Entrants sheetorviaafundingpartner,theyrepresentdirectcompetitionwithfinancialinstitutionsforcredit
distribution

Introduction Findings A B C D Uncertainties EndStates Conclusion 112

LENDING| FINDINGC

Nonfinancialplatformsareemergingasanimportantsourceofunderwriting
dataandapointofdistributionforcredit(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

LoansthroughAmazonLending
($billion)
Nonfinancialplayer Platformbased 3.5
offeringloans tradefinancing
3
Amazonofferscredittomerchantsthat TradeshiftsB2Bsupplychainplatform
2.5
sellonitsplatform,usingsalesdatato connectsfinancialinstitutionswith
2
measurerisk.Ifamerchantdefaultson supplierstooffertradefinancingdirectly
theloan,Amazoncanchooseto throughitsplatform.Onceaborrower
1.5
withholdsalesonitsplatform.The requeststheloan,incumbentlenders 1
companyhasalreadymadeloansworth receiveaccesstogranulardatathat 0.5
over$3billionusingthisplatform,andis enablesthemtounderwritetheloan. 0
expandingtheofferingtoreacheven Tradeshiftbenefitsfromimprovedclient 2011 2013 2015 2017
moremerchants.6 serviceandoriginationfees.7
AcceleratinggrowthinAmazonLending6

KEYUNCERTAINTIES

Lendingatthesource(i.e.theplatform)hasthepotentialtodramaticallyshiftthebalanceofpowertowardscustomerplatforms

1 Howcanfinancialinstitutions 2 Whatisstoppingothernon 3 Arethereothernonfinancial

createasymbioticlending financialplatformsfromoffering platformsthatmakesenseasan
relationshipwithnonfinancial theirownlendingproducts? originationvehicle?
platforms?

Sources:6.TechSpot 7.CityA.M.

Introduction Findings A B C D Uncertainties EndStates Conclusion 113

LENDING| FINDINGD

Fundingeconomicsputmarketplacelendersatacostdisadvantagecomparedto
traditionalbanks,raisingquestionsaboutthemodel'ssustainability
Despiteoperatingcostadvantages,marketplacelenderssufferfromhigherfundingcosts,creatingchallengesinpricesensitivesegments
andforcingthemtoexploreothermodels

SUPPORTINGEVIDENCE

Buildingaclientbasefromscratchhasprovedtobeexpensivefornewentrants,particularlywherethey
HighCustomer havereliedonhighcostanalogchannelssuchasdirectmail.Thesehighercustomeracquisitioncostshave
AcquisitionCosts createdparticularchallengesinsegmentswhereincumbentsarewellestablishedandmarginsarelow,as
incumbentsalreadyhaveawelldefinedclientbaseandthereforealargecostadvantage

Whiletheabsenceofabranchnetworkcreatescertaincostadvantagesfornewentrants,theyaremore
HighFunding
thanoffsetbysignificantlyhigherfundingcoststhanforbanks.Whileincumbentbanksareabletodeploy
Costsfor
Marketplaces lowcostdeposits,newentrantshavereliedonprivateinvestors,whodemandhigherpremiumstoreflect
ahighercreditrisk(perceivedorotherwise)andalesserknownbrand

Maintainingliquidityinatwosidedmarketplacehasprovedtobedifficult.Marketplacesinitiallysought
Funding hedgefundcapitaltofundgrowth,butfoundthiscapitaltobeunstableashedgefundspulledbackdueto
Instability broadermarketvolatility.Inresponse,marketplacesarenowexploringalternatives,includingacquiring
bankinglicences,whichwouldgivethemaccesstolowercostfundingsourcessuchasdemanddeposits

Introduction Findings A B C D Uncertainties EndStates Conclusion 114

LENDING| FINDINGD

Fundingeconomicsputmarketplacelendersatacostdisadvantagecomparedto
traditionalbanks,raisingquestionsaboutthemodel'ssustainability(continued)

CASESTUDIES QUANTITATIVEEVIDENCE
TotalCostofAttractingFundsin UK
CurrentvsNormalized,inBasisPoints(bps)
(200bpsbaserate)10

Majorinstitutionalfunding Onlinelenderseeking +25%

795
depositlicence
+13%
Prospermarketplaceclosedadealin SoFi,amajorUSonlinelenderfocused 635
530
February2017withaconsortiumof onstudentandmortgageloans, 470
institutionalinvestorstopurchaseup appliedforabankinglicenceinJune
to$5billionofloansthroughthe 2017todiversifyfunding.10 Themove
lenderoverthefollowing24months.8 comesaftersimilaractionsbyseveral
Thedealincludedwarrantsto othermajorlenders,includingZopa,
Banks Banks OnlineLendersOnlineLenders
purchase35%ofthelendersequity, theUnitedKingdomsfirstonline
(Current) (Normalized) (Current) (Normalized)
highlightingitsdesiretosecurelong lender.10
Opex FundingCosts ReturntoInvestors
termfunding.
Onlinelenderspaymoretoattractfunds,
especiallyinanormalizedenvironment
KEYUNCERTAINTIES

Astrategyoffundingdiversificationandcostoptimizationiscriticaltomarketplacelenders,butitblursthelinewithtraditionalbanking

1 Willmarketplacelendersbeable 2 Howwillmarketplacelenders 3 Howwillmarketplacelenders

todrivedowntheirfundingcost attractdepositsiftheybecome resolvetheirfundinginstability
sufficientlytocompeteforprice banks? issues?
sensitiveclients?

Sources:8.TheWallStreetJournal9.TechCrunch10.CNBC11.Deloitte

Introduction Findings A B C D Uncertainties EndStates Conclusion 115

LENDING|KEYUNCERTAINTIES

Fivekeyuncertaintiesarisefromthelendingfindingswhichwillshapethis
industry'sdirection

1 WHATWEKNOW Thelendingfindingsillustratehowfintechshavealteredcustomerperceptionofthelendingexperience.Fintechsare
usingdatatoprovidecustomerswithpainfreelendingservices,andcustomerswantthesameefficient,seamless
experiencewiththeirbanks.Additionally,consumerscanchoosefromamultitudeoffinancialandnonfinancial
providers.However,fintechsarestrugglingtofindasustainablebusinessmodelinthefaceoffundinginstability.

Throughthesefindings,thefollowinguncertaintiesaroundlendingemerged:

2 UNCERTAINTIES

Howmuchmore Willplatformbased Whatisthelong Willmarketplace Howwillthe

effectivewill lendingemergeto termimpactof lendersmoveto borrowers
underwriting becomearelevant marketplacelenders providedirect preferenceof
becomewithnew distribution licensingtheir lending? distribution
sourcesofdataand channel? underwriting channelscontinueto
analytical technology? evolve?
techniques?

3 POSSIBLEFUTURES

Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureofthelendingindustry:

DifferentEvolutionaryPaths SharedServiceProviders Distribution2.0

Introduction Findings Uncertainties EndStates Conclusion 116

LENDING| POTENTIALENDSTATES
Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms
DIFFERENT
EVOLUTIONARYPATHS
Thefirstendstatepaintsaworld
where:
Marketplacelendersare
challengedasfundingcostsrise
Marketplacesfurtherspecialize
andtargetnicheareas
Othermarketplacelenders
seektobecomebanks
Customersbenefit,especially
innicheareas
Introduction Findings Uncertainties
SHARED
SERVICEPROVIDERS DISTRIBUTION2.0
Thesecondendstatepaintsa Thethirdendstatepaintsaworld
worldwhere: where:
Certainmarketplacelenders Lendersformpartnershipswith
becomeB2Bserviceproviders nonfinancialfirms
Banksfindserviceproviders Nonfinancialfirmsusetheir
morecapableandcost platformstooriginateloans
effectivethantheirown
Lendersbegintooffermore
internalfunctions
customizedproductsusing
Serviceprovidersflourishand additionaldata
becomeindispensable
Consumersbenefitfromloans
Theindustryscostbase atthepointofneed
becomescommoditized
EndStates Conclusion 117
LENDING| ENDSTATEONE

Marketplacelendershavetofurtherdevelopsophisticatedcapabilities
orcompeteonpricewithestablishedbanks

1 3
Marketplacelendersare
challengedintheirattempts
toscaleup,astheirformer
competitiveadvantagesof
speed,serviceand
underwritingaccuracyare
commoditized
Somemarketplacelenders
shifttheirfocustoniche
productsandtoclients
currentlyunderservedby
largebanks
2 fundingcosts
Othermarketplacelenders
choosetocompetehead
onwithestablishedbanks,
acquiringbankinglicences
andretaildepositsto
lowerandstabilizetheir
Asaresult,the
marketplacelending
modelevolvesitselfaway,
asfirmseitherchaseniche
markets,becomebanksor
gooutofbusinessentirely
4

CRITICALCONDITIONS
Marketplacelendersfailtoemergeasdominantplayersinnon
nichemarkets
Incumbentbanksareabletosufficientlyloweroperatingcosts
quicklyenoughtooutperformmarketplacelenders
EARLYSIGNS
Thegrowthofmarketplacelenderscontinuestobeweak
Somemarketplacelendersexpandintonewproductsand
customersegments
Othermarketplacelendersshifttoacquirebankinglicences

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 118

LENDING| ENDSTATEONE

Clientswillbenefitfrommoresophisticatednichelendingandincreased
competitionasthelendinglandscapebecomesmorefragmented

Implicationsfor
ImplicationsforIncumbents AlternativeLenders

Competitionincreasesfornicheareas,but Alternativelendershaveaccesstomuch
overallcompetitiondecreasesas smallersectionsofthemarketasthey
marketplacelendersbecomeless cedemarketsharetobanks
competitive
Convergencewithdigitalbanking
Marketplacelendersbecomearegular fintechscouldleadtoincreased
venueforbankstodeployexcesscapital competition
Significantgrowthoccursacrossnew
Different nichemarkets
EvolutionaryPaths

ImplicationsforRegulators ImplicationsforCustomers

Awarenessisrequiredofrisksstemming Customersbenefitfromexpanded
fromincreasedconsolidationas availabilityofcredittounderserved
incumbentsgainmarketshare markets
Regulatorsmustdefinetherulesfor
edgecasesaslendingfirmstrytoadapt
theirbusinessmodel,becomingmore
likeabank

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 119

LENDING| ENDSTATETWO

ThedesireforcostcommoditizationdrivesgrowthinB2Bservice
providers,astwoneedscometogetherinonesolution

1 lenderslargelyfailtogain
Offeringfasterloansand
leveragingnontraditional
underwritingmethods,
marketplacelendersshift
customerexpectationson
whattoexpectfromthe
loanexperience
However,marketplace
sufficientscaletoovercome
theirconsiderable
disadvantagesinfunding
costs,andstruggleto
remainviable
2 deliveryapproach
3 toworkwithbanksasB2B
Meanwhile,banks
operatingonexpensive
legacycostbaseswith
limitedcapabilitiesfind
partnershipswithservice
providerstobethebest
Asaresult,some
marketplacelenderschoose
serviceproviders,and
banksoutsourcethe
majorityoftheirlending
technologytomarketplace
lenders
4

CRITICALCONDITIONS EARLYSIGNS
Regulatorsbuyintosharedservicemodelsbetweencompetitors Lendingmarginscontinuetoerode
Acriticalmassoffinancialinstitutionsusingsharedserviceand Specializedcapabilityprovidersthatsuccessfullydeliverabsolute
externalprovidersisreached costadvantagesproliferate
Connectivitybetweencapabilityprovidersandbanksbecomes Businessesdevelopadjacenttosharedservices(e.g.rating
standardized agenciesforvendors)

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 120

LENDING| ENDSTATETWO
Increasingexternalizationimprovesindustrycostbases,butcreatespotential
newpointsofsystemicrisk
ImplicationsforIncumbents
Externalizationleadstosignificant
reductionsofinhousemiddleandback
officefunctions
Manyinhousecapabilitiesthathaveset
apartbanksfromcompetitionareno
longerdifferentiators
Increasedcapacityfromsoftwareasa
serviceprovidersmakesITexpenditures
moreofavariablecost,decreasingthe
benefitsofscale
ImplicationsforRegulators
TheriseinB2Bproviderspotentially
increasesthesystemicriskofasingle
pointoffailure
Granularityincreases,andservice
providersfacemoreintenseregulatory
scrutiny
Introduction Findings Uncertainties
Implicationsfor
AlternativeLenders
Aslendersbusinessmodelsmovefrom
B2CtoB2B,thecapabilitiesrequiredfor
successshiftsignificantly
Nonfinancialfirmsexpandintolending
asbarrierstoentryfall,potentially
leadingtoareturntotheeraof
personalcreditissuedbyretailers
SharedService
Providers
ImplicationsforCustomers
Morecompetitiononserviceandcosts
ashighqualityexecutionbecomes
commoditized
Lowerloancostsasbankoperating
expensesdecrease
Marketfragmentationdrivesanintense
battleformindshare
EndStates 1 2 3 Conclusion 121
LENDING| ENDSTATETHREE

Nonfinancialfirmsmovehorizontallyintofinancialservicesand
disintermediatethetraditionalbrokerchannel

1 Lendersform
3 Nonfinancialplatforms
effectivelyreplacethe
partnershipswithnon
traditionalbrokerchannel,
financialplatformstouse Lendersimprovethe
Aslendingbecomes andderiveadditional
theirdataandofferloans sophisticationoftheir
commoditized,lenders customerloyaltyfrom
throughtheiruser underwriting,usingtheir
lookfornewopportunities havingcustomerslockedin
interfaces partners'datatomake
toacquirepotential totheirecosystem
customersandhigh highlytargetedoffersthat
qualitydataontheir anticipatecustomer
currentcustomers 2 needs
4

CRITICALCONDITIONS EARLYSIGNS
Connectivitybetweenthenonfinancialfirmandthebankallows Smallandmediumsizedbusinessesincreasinglyadoptcloudbased
bankstoreceivedatafrom,andtoofferloansthrough,theplatform softwaresolutions
Dataprovidedbynonfinancialfirmsisconsideredbetterthanfrom Morenonfinancialfirmsbegintomoveintothefinancialservices
othersourcesinadjudicatingcredit area,eitherontheirownorthroughpartnershipswithexisting
lenders

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 122

LENDING| ENDSTATETHREE
Aspartnershipsbetweenbanksandnonfinancialfirmsproliferate,customers
experienceimprovesandchoicesbecomenumerous
ImplicationsforIncumbents
Theriseofplatformsasintermediaries
meansincumbentsmovefurtheraway
fromtheircustomers
Someplatformsmayactasaggregators
andallowforcomparisons,thereby
increasingpricecompetition
Incumbentsacquireabetter
understandingofclientsastheygain
accesstoanewanddeeperpoolofnon
financialdata
ImplicationsforRegulators
Regulatorsneedtomonitornewnon
financialdistributionchannelsand
potentiallyregulatepreviously
unregulatedparties
Introduction Findings Uncertainties
Implicationsfor
NonFinancialFirms
Suchfirmsdevelopanewsourceof
revenue,asplatformsreceivefeesin
exchangeforaccessanddata
Theyproactivelyprovidefundingto
clientsdirectlyinapp,thereby
increasingcustomerinteractionand
providingmorepullintotheplatform
Thefirmshaveadeeperrelationship
Distribution2.0 withtheirbanksandmorebargaining
powerinnegotiations
ImplicationsforCustomers
Customersbenefitfromanimproved
experience:loansareavailabledirectly
inapp,andcustomersknowin
advancedwhethertheyareapproved
Customershaveimprovedcomparability
offinancialproducts andaccessto
multipleproviders
EndStates 1 2 3 Conclusion 123
LENDING|CONCLUSION

Keytakeawaysforfinancialinstitutions

THELOWESTFUNDINGCOSTSWIN
1
Despiteinnovationsinoriginationandadjudication,theonlinelendingmodelisfundamentallylimitedby
highandunstablefundingcostsinitsabilitytocompetewithbanks.Theneedforaconsistentfunding
sourceatacostsimilartothatofdepositsforbankswilldriveonlinelenderstoacquirebankinglicences
unlessanalternativefundingsourcecanbefound

LENDINGGOESDIGITAL
2
Marketplacelendersandtechnologyfirmshavereorientedcustomerexpectations.Leadinglendersare
expectedtooffersimplecreditoriginationexperiences,whereacombinationofdesignandautomation
providescustomerswithafrictionlessapplicationexperienceandaswiftresponse

LENDERSUSEDATAEFFECTIVELY
3
Leadinglendersareusingdatatoimproveboththeeffectivenessandtheefficiencyoftheiradjudication
processes.Theyemploynewsourcesofdatatounderwriteapplicationswhoseriskscouldnotpreviously
beassessed(e.g.thinfilecustomers),andreduceunderwritingcostsbyautomatingthecollectionand
analysisofkeydata(e.g.usingdatacollecteddirectlyfromasmallbusinessaccountingplatform).Moving
forward,lenderswillincreasinglylookfornewsignals/datatoinformlendingdecisions

Introduction Findings Uncertainties EndStates Conclusion 124

LENDING|REFERENCES

References

1. ZestFinanceIntroducesMachineLearningPlatformtoUnderwriteMillennialsandOtherConsumerswithLimitedCreditHistory.YahooFinance.Retrievedfrom
https://finance.yahoo.com/news/zestfinanceintroducesmachinelearningplatform150000764.html
2. Marketplacelending2.0:Bringingonthenextstageinlending.Deloitte.Retrievedfromhttps://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial
services/usfsimarkeplacelending2.pdf
3. YouCanNowBeApprovedforaMortgagein8Minutes.Money.Retrievedfromhttp://time.com/money/4129146/quickenloans8minutemortgage/
4. InsideJ.P.MorgansDealWithOnDeckCapital. TheWallStreetJournal.Retrievedfromhttps://www.wsj.com/articles/insidejpmorgansdealwithondeckcapital
1451519092
5. AlternativeLending.EY.Retrievedfromhttp://www.ey.com/Publication/vwLUAssets/eyunderstandingalternativelending/$File/eyunderstandingalternative
lending.pdf
6. Amazonhaslentover$3billiontomerchantssince2011.TechSpot. Retrievedfromhttp://www.techspot.com/news/69665amazonhaslentover3billionmerchants
since.html
7. HSBC'spartneringwithfintechstartupTradeshifttooffertradefinancingandhelpbusinessesincreasetheirworkingcapital. CityA.M.Retrievedfrom
http://www.cityam.com/262044/hsbcspartneringfintechstartuptradeshiftoffertrade
8. ProsperInks$5BillionLoanBuyingDealWithInvestorsIncludingSoros,Jefferies.TheWallStreetJournal.Retrievedfromhttps://www.wsj.com/articles/prosperinks5
billionloanbuyingdealwithinvestorsincludingsorosjefferies1488222470
9. SoFihasappliedforabankcharter.TechCrunch.Retrievedfromhttps://techcrunch.com/2017/06/12/sofiappliestobeabank/
10. Zoparaises$41.2millionforchallengerbanklaunch.CNBC. Retrievedfromhttp://www.cnbc.com/2017/06/02/zoparaises41point2millionforchallengerbank
launch.html
11. Atemporaryphenomenon?Marketplacelending:AnanalysisoftheUKmarket".Deloitte.Retrievedfrom
https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financialservices/deloitteukfsmarketplacelending.pdf

Introduction Findings Uncertainties EndStates Conclusion 125

Section3.5
InvestmentManagement

WORLDECONOMICFORUM|2017 126
INVESTMENTMANAGEMENT| INTRODUCTION

Investmentmanagementhasgreatlyevolvedinthelastseveralyears.Thissection
examinesthekeytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadewasmarkedbyprofoundchangestotheinvestmentmanagementindustry,includingtheentryofseveral
majorforcesthatheldthepotentialtofundamentallyshifttheindustry'scourse

CIRCA2015,THEMAJORFORCESIMPACTINGINVESTMENTMANAGEMENTWERE

IncreasingB2B
TheRiseofRoboAdvisors BigDataDrivenAnalysis Externalization

Automatedadvisersthatusetrading Fintechswerebeginningtotapinto Firmswerestartingtooutsource

formulasbasedonlowfeeETFs thepotentialofbigdatafor backofficeprocesses,suchas
werecapturingattention investments regulatorymonitoring

CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFINVESTMENTMANAGEMENTWERE

Wasroboadvisoryservice Howwouldcompanies
Wouldmonolinefintechs
trulytherightanswerfor lookatB2B
beabletocapture
thevastmajorityof externalizationasmargins
significantmarketshare?
customers? continuedtodecline?

Note:Wealthmanagersaredefinedasorganizationsthatprovideadviceanddistributeproductstocustomersininvestment
management.AssetManagersarecompaniesthatmanufacturethefinancialproductitself,whichformsthebasisfortheinvestment

Introduction Findings Uncertainties EndStates Conclusion 127

INVESTMENTMANAGEMENT| OVERVIEWOFFINDINGS

Fourtrendsintheinvestmentmanagementindustryhaveshapeditsfuture,and
incumbents,notinnovators,lookpoisedtobenefit

WHEREDIDDISRUPTIONOCCUR?

Asindividualsbecomemoreresponsiblefortheirinvestments,robodistributionhasbecomethemost
A compellingtoolforcustomerengagement

Scalingthedeliveryofinvestmentadvicerequiresfewerresources,asmiddleandbackofficefunctions
B areincreasinglybeingautomatedorexternalized

Thegrowthoflowcostproductshasincreasedtheimportanceofscaleinproductmanufacturing,
C drivingpressuresforconsolidation

WHEREHASDISRUPTIONNOTOCCURRED?

Newentrantstoinvestmentmanagementhavestruggledtogainmarketshareinthefaceofcustomer
D stickinessandhighcustomeracquisitioncosts

Introduction Findings Uncertainties EndStates Conclusion 128

INVESTMENTMANAGEMENT| FINDINGA

Asindividualsbecomemoreresponsiblefortheirinvestments,robodistribution
hasbecomethemostcompellingtoolforcustomerengagement
Asemployersabandontraditionaldefinedbenefit(DB)plansinfavourofdefinedcontribution(DC)plans,individualsarebecomingmore
responsibleformanagingtheirowninvestments,drivinganeedforlowcostinvestmentsandadviceonassetallocation

SUPPORTINGEVIDENCE

Babyboomersaredrawingdownondefinedbenefitplans(guaranteedbenefits),whileyoungerworkers
Shiftfrom arepredominantlylimitedtodefinedcontributioninvestmentplans(benefitsbasedoninvestment
Institutionalto returns).Thesetrendsareincreasingtheshareoftotalinvestmentsthatareselfmanaged,drivingdemand
Individual forproductsandservicestargetedtoindividualsasopposedtoinstitutionalinvestors

Regulatorshavesteppedupeffortstoprotectretailinvestors,citingmissellingscandals,risinginvestor
Increasing
dissatisfactionandtheshiftingofretirementburdensfrominstitutionstoindividuals.Anunintended
Regulation
consequenceofthesepoliceshasbeentoincreasethecostofprovidingcustomerswithindividualized
RaisingCosts
offeringsthroughtraditionalchannels,makingroboadvisorsacompellingsolution

Customershavebecomeaccustomedtocustomercentricofferingsandserviceinnonfinancialsettings,
RisingClient andexpecttheirfinancialservicesexperiences,includingwealthmanagement,toexhibitsimilar
Expectations characteristics.Roboadvisoryproductsofferadigitalandcustomercentricexperienceatalowcostand
arethusattractive,particularlyforyoungercustomers

Introduction Findings A B C D Uncertainties EndStates Conclusion 129

INVESTMENTMANAGEMENT| FINDINGA

Asindividualsbecomemoreresponsiblefortheirinvestments,robodistribution
hasbecomethemostcompellingtoolforcustomerengagement(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

GlobalAssetManagementIndustryNetNew
FlowsbyInvestorType(%)4

Roboadvisoryproductforthemasses Newstandardsforadvice
36
CharlesSchwabhasrolledoutits TheUSDepartmentofLaborFiduciary Retail/DC
IntelligentPortfolioroboadvisory Rulewillelevateallfinancial
productfocusedonmassandmass professionalswhoprovideretirement 103

affluentcustomers.Withminimums planningadvicetothelevelofa Institutional 64

of$5,000andnofeesapartfromETF
productfees,aswellas24/7access
toinvestmentprofessionals,Charles
Schwabisaimingtocompeteagainst
fintechssuchasWealthfront.1
KEYUNCERTAINTIES
Towinoverindividualinvestors,incumbentsareseekingtodifferentiatetheirofferingsthroughproductdevelopmentandthe deliveryof
fiduciary,boundlegallyandethicallyto
meetthestandardsofthatstatus.This
ruleandotherslikeit,includingtheUK 3
YearEnd2016AUM 2016NetNewFlows
FinancialConductAuthority'sruleson
investmentmanagement,raisethecost Shiftfrominstitutionaltoretail
ofadvisoryserviceandmakerobo
investorsmoreattractive.2,3
bespokeservices

1 Howwillfirmsdifferentiatetheir 2 Howfarwillregulatorspushin 3 Howwillaprolongedperiodof

roboadvisoryofferingsfrom mandatingtransparencyand lowmarketreturnscontinueto
similarofferingsthroughoutthe fiduciarydutyinadvice? shiftindustryeconomics?
industry?

Sources:1.CharlesSchwab2.Investopedia3.Forbes4.Deloitte(CaseyQuirk)

Introduction Findings A B C D Uncertainties EndStates Conclusion 130

INVESTMENTMANAGEMENT| FINDINGB

Scalingthedeliveryofinvestmentadvicerequiresfewerresources,asmiddleand
backofficefunctionsareincreasinglybeingautomatedorexternalized
Assetandwealthmanagersareseeingmarginsdeclineandareturningtoexternalizationandautomationtolowercosts.Asnoncore
functionsbecomeexternalizedandcommoditized,theindustryvaluechainthreatenstoshiftconsiderably

SUPPORTINGEVIDENCE

Margin Manufacturingmarginsaredecliningasdemandshiftsfromhighcosttolowcostproducts,and
Compression distributionmarginsarefallingasroboadvisorsgainpopularity.Thispressureisdrivingincumbentsto
Forcing searchforsavings,especiallyintheareasofthevaluechainthataddtheleastvalue themiddleandback
CostCutting office

Enabledbytechnologicaladvancements,externalserviceprovidersaregrowingandbuildingatrackrecord
Growthin
ExternalService ofsuccessindrivingefficiency.Asthesefirmsproliferateandallowassetmanagerstofocusonthe
Providers strategicaspectsofinvesting,theywillbetrustedwithmoreandmorefunctionsthatarecentraltothe
assetmanagersoperations

Automationand AutomationandAIarebecomingmorecapableandmaysoonbeabletoreplacecomplexhumanactivities
AIReplacing
acrossthefront,middleandbackoffice.Astheydoso,competitiveadvantagesderivedfromexcellencein
Processes
processexecutionwilldeteriorate,leadingtoevenmoreprocessexternalization

Introduction Findings A B C D Uncertainties EndStates Conclusion 131

INVESTMENTMANAGEMENT| FINDINGB

Scalingthedeliveryofinvestmentadvicerequiresfewerresources,asmiddleand
backofficefunctionsareincreasinglybeingautomatedorexternalized(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

GrowthinAddepar's*AssetsonPlatform
($billion)7
Realtimeanalytics Zerocommissiondiscount 700 650
broker 600
Kenshodrasticallyreducesthemanual Robinhoodisadigitaldiscountbrokerage 500
analyticsrequiredtoexplorefuturesfor thatallowsuserstotradesecuritieswith 400 300
capitalmarketsandallowsusersto zerocommissions.6 Recently,itannounced 300
expressthosefuturesusingnatural partnershipswithotherwealth 200
language.MedianetworkCNBCused managementinnovators,suchas 100
Kenshostooltoanalysetheimpactof Quantopian,OpenFolioandStockTwits,to 0
recentpoliticalevents(e.g.WannaCry providecustomersofthoseonlinetools Jan16 Jun17
cyberattack)onstockprices.5 accesstoadditionalservicesthroughits *Externalwealthmanager
platform.
Massivegrowthinexternalserviceplatforms

KEYUNCERTAINTIES

Asinnovativevendorsprovideeconomicalaccesstosophisticatedcapabilities,highqualityprocessexecutionisbecomingacommodity

1 Wherewillfirmsstrikethe 2 Howdoescommoditizationof 3 Howdoesthedivisionof

balancebetweenautomatingand backofficefunctionsaffectan regulatoryresponsibilitieschange
maintainingmanualprocesses? institutionsabilityto asfunctionsareexternalized?
differentiateitself?

Sources:5.CNBC6.Robinhood7.Finextra

Introduction Findings A B C D Uncertainties EndStates Conclusion 132

INVESTMENTMANAGEMENT| FINDINGC

Thegrowthoflowcostproductshasincreasedtheimportanceofscalein
productmanufacturing,drivingpressuresforconsolidation
Asthedemandforlowcostinvestmentsgrows,utilizingeconomiesofscaletolowerproductcostsandofferingdifferentiatedproducts
atlowcostbecomemajorcompetitivepriorities

SUPPORTINGEVIDENCE

Forassetmanagers,excessreturnsoverthemarket(alpha)haveprovenelusivetogenerateinthepost
AlphaBecoming
crisisenvironment,makingitdifficultformanagerstojustifytheirhigherfeesanddiminishingtheirappeal
MoreElusive
infavouroflowcostproducts

LowFees,High Asthepopularityoflowcostproductshasgrown,providershaveprimarilycompetedonthebasisofprice,
Economies withthelowestcostUSequityETFchargingjustthreebasispoints.Thissignificantadvantageofscalein
ofScale theproductionoflowcostproductsmeansindustryconsolidationisinevitable

ThegrowthoflowcostETFproductshascreatedagapinthemarketforinvestorsthatareattractedto
Riseof activestrategiesbutarealsolookingforlowcosts.Asaresult,smartbetaproductsthatemployactive
SmartBeta strategiesbutuselowcostbetaproductshaveriseninpopularity,andarealsohelpingtodrivethepush
foradditionalscaletolowercosts

Introduction Findings A B C D Uncertainties EndStates Conclusion 133

INVESTMENTMANAGEMENT| FINDINGC

Thegrowthoflowcostproductshasincreasedtheimportanceofscalein
productmanufacturing,drivingpressuresforconsolidation(continued)

CASESTUDIES QUANTITATIVEEVIDENCE
InvestorAverageFeeBudget
(inbasispoints)10
179 bps
Passiveproductsas Consolidationof 165 bps
competitiveadvantage humanmanagedfunds 43
46 Advice
Asanearlyproponentofindexfunds, Continuing30yearsofR&Dandstrong
36
Vanguardhasbenefitedgreatlyfrom investmentperformanceofits 35 Intermediary
theongoingshifttolowcost quantitativeinvestingteam,BlackRock
investmentswhileitscompetition laidoutanambitiousplantoconsolidate 57
46 Administrative
grappleswithdecliningmargins. alargenumberofhumanmanaged
Vanguardattractednetmutualfund mutualfundsthatrelyonalgorithms Asset
43 38
flowsof$823billionoverthelast andmodelstopickstocks.Thesefunds Management
threeyears,8.5timesasmuchasits focusonquantitativeandother 2013 2015
competitorscombined.8 strategiesthatadoptamorerulesbased
Significantdeclineinfeesdueto
approachtoinvesting.9 lowcostproducts

KEYUNCERTAINTIES

Astheassetmanagementindustryconsolidates,largemanufacturersarecapturingthevastmajorityofnewflows

1 Howwilllowcostproducts 2 Howwillrisinginterestrates 3 Willactivemanagersbeableto

performinacomplexandvolatile affectchoicesofinvestment generatesufficientalphatostem
macroenvironment? methodologies? theflowtolowcostproducts?

Sources:8.TheNewYorkTimes9.TheNewYorkTimes10.CaseyQuirk

Introduction Findings A B C D Uncertainties EndStates Conclusion 134

INVESTMENTMANAGEMENT| FINDINGD

Newentrantstoinvestmentmanagementhavestruggledtogainmarketsharein
thefaceofcustomerstickinessandhighcustomeracquisitioncosts
Incumbentshavequicklycooptedtheroboadvisorymodel,drivingmonolineroboadvisorstoexplorenewbusinessmodels,suchas
licensingtheirtechnologytoincumbents

SUPPORTINGEVIDENCE

Monolineroboadvisorshaveprimarilyattractedmassormassaffluentcustomers.Coupledwiththeirlow
Challenging
fees,theseclientsgeneraterelativelylowpercustomerrevenue.Theseeconomicshaveproven
PerCustomer
challenging,ascustomeracquisitioncostsarehighrelativetoeachcustomer'svalue,makingitdifficultto
Economics
beprofitable

Roboadvisoryofferingshaveproventoberelativelyquickandeconomicaltodevelop.Thelowcostof
LowBarriers entryhasallowedincumbentwealthmanagerstofastfollownewentrantsandbuildtheirownofferings,
toEntry
whichtheycanthenoffertotheirexistingcustomerbasetokeepcustomeracquisitioncostslow

Traditionalwealthmanagementservicesarebecomingcommoditizedasnewentrantsautomateadvice
ValueAdded andcashflowmanagementservices.However,thiscommoditizationhasunderscoredthatclientsvalue
Services highlyintangible"human"capabilitiesandbespokeservices,especiallyastheyincreaseinnetworth.
Incumbentsabilitytoprovidetheseservicescanfostercustomerstickiness

Introduction Findings A B C D Uncertainties EndStates Conclusion 135

INVESTMENTMANAGEMENT|FINDINGD

Newentrantstoinvestmentmanagementhavestruggledtogainmarketsharein
thefaceofcustomerstickinessandhighcustomeracquisitioncosts(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

TopRoboAdvisorsby
AssetsunderManagement,2016($billion)13,14,15,16,17,18
Incumbents NewEntrants

Earlydigitaladviceplatform Flatfeedigital $47.0

boughtbyassetmanager investmentadvice

InAugust2015,FutureAdvisorwasthe Macquarie,aleadingassetmanagement
firstmajorcustomerfacingrobo andinvestmentbankingfirmfrom $12.3
advisoryproductboughtbyoneofthe Australia,launchedOwnersAdvisoryin $6.7 $4.4 $2.9
leadingglobalassetmanagers 2015,offeringflatfeedigitalinvestment
(BlackRock).11FutureAdvisornow adviceservicethatempowersself Vanguard Schwab Betterment Wealthfront Personal
Personal Intelligent Capital
providestechenableddigitaladvicefor directedinvestorsacrossvariousasset
Advisor Portfolio
investorsthroughbanksandwealth classes.12
managersinanopenarchitecture Rapidconsolidationofthe
platform. marketbyincumbents

KEYUNCERTAINTIES

Benefittingfromtheirstrongbrands,bothdistributorsandmanufacturersarequicklyandsuccessfullycooptingtheroboadvisorymodel

1 Howwilltheroleofhuman 2 Willthemajorityofwealth 3 Howcanwealthmanagers

advisersbeaffectedbyincreased managerschoosetobuild,buyor differentiatetheirroboadvisory
automationandtheshifttorobo partnertoofferroboadvice? offerings?
advisors?

Sources:11.Forbes12.Macquarie13.CharlesSchwab14.BusinessInsider15.BusinessInsider16.Forbes17.Bloomberg18.Investopedia

Introduction Findings A B C D Uncertainties EndStates Conclusion 136

INVESTMENTMANAGEMENT| KEYUNCERTAINTIES

Uncertaintiesininvestmentmanagementlargelyrevolvearoundthenatureof
futureinvestmentproductsandthecompositionoftherelatedvaluechain

1 WHATWEKNOW Thesefindingsillustrateincreasingclientexpectationsandtheimportanceofapersonalizedcustomerexperience.As
middleandbackofficefunctionsareautomatedorexternalized,firmsareforcedtodifferentiateonhighquality
processexecutionanddistinct,tailoredadvice.Customerstickinessandthehighcostofnewcustomeracquisition
allowincumbentstobenefit,assuccessfulfintechofferings,suchasroboadvisors,arequickandeasytoreplicate.

Throughthesefindings,thefollowinguncertaintiesaroundinvestmentmanagementemerged:

2 UNCERTAINTIES

Towhatdegreewill Howwillwealth Willclientscontinue Howwilltheroleof Willproduct

product managers topreferlowcost humanadvisersand manufacturingbe
manufacturersmove differentiatetheir investments,orwill theirjob characterizedby
upstreamand roboadvisory guaranteed requirements moreorlessscale?
disruptdistributors? offerings? outcomeproducts change?
becomepopular?

3 POSSIBLEFUTURES

Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureoftheinvestment
managementindustry:

CertaintyBasedOfferings AdviceasaDifferentiator QualityExternalization

Introduction Findings Uncertainties EndStates Conclusion 137

INVESTMENTMANAGEMENT| POTENTIALENDSTATES
Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms
CERTAINTYBASED
OFFERINGS
Thefirstendstatepaintsaworld
where:
Retailclientshavelessaccess
totraditionalpensions
Retailclientsbecomeamore
attractivesegmentthan
institutionalclients
Roboadvisorsconditionclients
toexpectcertainty
Assetmanagementdevelops
anddeliversguaranteed
outcome"products
Introduction Findings Uncertainties
ADVICEAS
ADIFFERENTIATOR
Thesecondendstatepaintsa Thethirdendstatepaintsaworld
worldwhere:
Clients,especiallymillennials,
flocktoroboadvisors
Algorithmdriveninterfaces
expandacrossmultipleasset
categories
Wealthbecomestheprimary
pointofinteractionwith
financialinstitutions
Datasharingagreements
becomemuchmoreimportant
tounderstandconsumers
EndStates Conclusion
QUALITY
EXTERNALIZATION
where:
Moreandmorecloudand
platformasaserviceproviders
emerge
Benefitsofscaleerodeashigh
qualityexecutionbecomesthe
norm
Muchofthemarketgets
consolidatedintolargefirms
thatcanafforddifferentiated
technology
Manyspecializedsmaller
wealthmanagersthriveby
appealingtonichemarkets
138
INVESTMENTMANAGEMENT| ENDSTATEONE

Growingprofitpoolsinretailwealthleadtoarenaissanceofproducts
guaranteeingapredefinedoutcome

1 combinedwiththegrowthof
Becauseofcompetitionand
ashifttolowcostproducts,
lowermarginsonthe
institutionalsidedrivethe
industrytoincreaseits
focusonindividualinvestors
Employersshifttodefined
contributionprogrammes,
theselfemployment
economy,meansmore
peoplelackcertaintyabout
theirretirement
2 conditionsandthuslack
3 Wealthmanagerscompete
bydeliveringguaranteed
orsemiguaranteed
Whilecalculatorsand productsdesignedtooffer
visualizationsmaycreate increasedcertaintyto
theperceptionofcertainty customers
inthecustomer'smind,
traditionalproductsstill
dependonmarket
4
certainty

CRITICALCONDITIONS EARLYSIGNS
Improvementsinanalyticsandriskmanagementprovidemore Theshiftofpensionsfromdefinedbenefittodefinedcontribution
granularinsightsintotheliabilitiesassociatedwithguaranteed continues
products
Partnershipsformbetweenproductmanufacturers,insurersand
Institutionsandmanufacturerswouldneedtobecomfortabletaking gigeconomyfirms
riskonsomebalancesheetsandholdingcapitalagainstit
Anoperatingmodelforbreakingdownbarriersbetweeninsurance
andwealthmanagement/bankingisacceptedbyregulators

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 139

INVESTMENTMANAGEMENT| ENDSTATEONE

Customerswillprofitfromproductsofferingincreasedcertainty,butstrong
partnershipsareneededtomanagerisks

Implicationsfor
ImplicationsforCustomers AssetManagers

Productsthatofferguaranteedoutcomes Individualdemandsallowproduct
increasecustomercertaintyabout developmentandbrandtobecome
retirement moreimportant
Predefinedandguaranteedoutcomes Theofferingofguaranteebased
preventseverelossesandarethusbetter productsmakesproprietaryrisk
optionsforriskaverseindividuals managementpracticesakey
differentiator
Thedualityofgoalbasedandvaluebased
propositionscreatesdifferentsegmentsof Increasedriskrequiresstronger
clients CertaintyBased collaborationwithwealthmanagers
Offerings (distribution)andinsurers(risk
management)

Implicationsfor
WealthManagers ImplicationsforRegulators

Theincreasingimportanceofindividual Theofferingofguaranteebased
clientsrequiressignificantinvestmentto productsrequirescorresponding
distributeviamobile/onlinechannels regulationandsupervision
Humanfactors(e.g.synthesis,decision Moreindividualdecisionmaking
making)arebecomingmoreimportant requiresmorecomprehensivefinancial
education

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 140

INVESTMENTMANAGEMENT| ENDSTATETWO

Basedonsignificantimprovementsinroboadvice,investmentadvice
becomestheprimarydriverofaclientschoiceofinstitution

1 differentiatetheirrobo
Astheentireindustry
embracesroboadvisors,
firmsincreasinglyfindit
difficulttodifferentiate
theirofferings startupsin
particularstruggledueto
thelackofastrongbrand
Wealthmanagerslookto
advisorstocaptureadditional
marketshare,including
offeringmoresophisticated
services,suchascashflow
management
2 4
3 Asaresult,theenhanced
automatedadviser
becomestheprimarypoint
ofinteractionforaclient,
Enhancedroboadvisors
touchallaspectsofan andtheprimarydriverofa
clientschoiceofinstitution
individualsfinancial
health,fromloan
repaymentstoinsurance
productselection

CRITICALCONDITIONS
Thecapabilitiesofroboadvisors(e.g.cashflowmanagement)are
significantlyimproved
Interoperabilityisestablishedbetweenproductsandservicesto
allowformanagingthemthroughasingleenhancedroboadvisory
system
Advisersareabletosecureaccesstoafullviewofrelevant
customerdata,includingexternaldata
EARLYSIGNS
Corebankingmarginsnarrow,increasingtherelativeimportanceof
wealthmanagementbusinessunitsasaprofitdriveranda
differentiator
Thenumberofpartnershipsandacquisitionsbetweenincumbent
institutionsandroboadvisors,orothertechnologyproviders,
increasesfurther

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 141

INVESTMENTMANAGEMENT| ENDSTATETWO

Investmentserviceswillbecomemoreconvenientbutalsolesstransparentfor
customers,whiletheroleofwealthmanagersbecomesmorecritical

Implicationsfor
ImplicationsforCustomers AssetManagers

Sophisticatedroboadvisors,coupledwith Powerdynamicsshiftawayfrom
customizedadviceandservices,improve manufacturersandtowardsdistributors,
experiencesandoutcomesfordigitally astheycontrolthecustomer
savvycustomers relationshipandmindshare
Therelationshipwithfinancialinstitutions
becomesservicebasedinsteadofproduct
based

Adviceasa
Differentiator

Implicationsfor
WealthManagers ImplicationsforRegulators

Highlyautomated,AIdrivenadvice Theneedtointerpretandregulate
requiressignificantinvestmentin behaviourofalgorithmsandAIinthe
systemintegrationforinformation retailareaincreases,especially
regardingrecommendations
Corecompetenciesshiftfromprocess
executiontomorehumanfactors(e.g.
synthesis,decisionmaking)
Theimportanceofdatawillleadtoa
focusonthirdpartydatasharing
agreements

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 142

INVESTMENTMANAGEMENT| ENDSTATETHREE

Increasingcostpressuresforcefirmstoeitherrelyonexternalservice
providersorgainthescaletoinvestindifferentiatedtechnology

1 3
Investordemandforlow
costadviceandproducts
accelerates,drivingdown
averagerevenueratesand
incentivizingassetand
wealthmanagerstolower
operatingcosts
Externalserviceproviders
quicklyproliferateasthey
demonstratesuccessin
loweringcostsand
improvingcapabilities
2 firms,whocaninvestin
Theindustrybifurcatesinto
smallfirmsthataggressively
pursueniches,andgiants
thatleveragedifferentiated
Externalserviceproviders technologytooffersuperior
meansmallandlarge productsandexperiencesto
playershaveaccesstothe themassmarket
samecapabilities.This
erodesthebenefitsofscale
exceptfortheverylargest
4
differentiatedtechnology

CRITICALCONDITIONS EARLYSIGNS
Capabilityprovidersdemonstratetheabilitytooffersimilarlevelsof Incumbentsarecomfortablewithcloud/platformasaservice
serviceatsubstantiallylowercost solutions
Regulatorsarecomfortablewithincreasedoutsourcingofcore IncreasingnumbersofutilitiesorB2Bcapabilityprovidersemerge
businessfunctions
Incumbentspartnerwithcapabilityprovidersasopposedto
Capabilityprovidersexhibitthenecessarylevelofinteroperabilityto acquiringthem
makeexternalizationefficient

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 143

INVESTMENTMANAGEMENT| ENDSTATETHREE

Increasingstandardizationandindustrybifurcationcreatenewopportunitiesas
wellasnewthreatsforallindustrystakeholders

Implicationsfor
ImplicationsforCustomers AssetManagers
Theemergenceofsophisticatedcapability Humancapitalneedsandorganizational
providersincreasesthespeedofand structurewillchangeinorderto
reduceserrorsinclientonboarding manageaportfolioofcapabilitiesas
Assetmanagementproducts,aswellas opposedtoaportfoliooftalent
interactionswithdistributors,become Theuseofcapabilityprovidersmakes
undifferentiatedfromacustomer middleandbackofficefunctionsmore
perspective efficient
Theabilitytodifferentiatebasedon
processisreduced,asexternalization
becomesanimperative
Quality
Externalization

Implicationsfor
WealthManagers ImplicationsforRegulators

Theuseofcapabilityprovidersmakes Visibilityincreasesduetonatural
middleandbackofficefunctionsmore standardizationcreatedby
efficient externalization
Thereducedabilitytodifferentiate Thepotentialforsystemicrisk,created
basedonprocessmeansscalebecomes bysinglepointsoffailure,needstobe
amajordifferentiator contained

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 144

INVESTMENTMANAGEMENT|CONCLUSION

Keytakeawaysforfinancialinstitutions

DIFFERENTIATIONOFOFFERING
1
Theongoingindustrywideautomationandexternalizationofmiddleandbackoffices,combinedwiththe
ubiquityofroboadvisoryofferings,arecommoditizingtheinvestmentadvisoryvalueproposition.
Consequently,leadingfirmswillseektoidentifyandinvestinotherwaysofdifferentiatingthemselvesto
standapartfromcompetition,inparticularthroughdeeperpersonalizationofcustomerofferings

ADVICEDRIVENCUSTOMERGUIDANCE
2
Asroboadvisorsbecomemoreubiquitousandmoresophisticated,leadinginvestmentmanagement
companieswilllooktousethesecapabilitiestodeepentheirengagementwithroboadvisorycustomers,
drawingonnewsourcesofdatatodeliveradviceonallaspectsoftheirfinanciallives.Thiswillmarkthe
startofachangeintheirrolefromroboinvestorstotrueroboadvisors

ROLEOFHUMANADVISERS
3
Thehumanadviserwillstillbecrucialwhendifferentiatingproducts,especiallyforhighnetwealth
customers,buttheroleofsuchadviserswillshiftinleadingcompaniesfromproductselectiontoafocus
oncustomerengagement,emotionalintelligenceanddecisionsupport

Introduction Findings Uncertainties EndStates Conclusion 145

INVESTMENTMANAGEMENT|REFERENCES

References
1. SchwabIntelligentPortfolios".CharlesSchwab.Retrievedfromhttps://intelligent.schwab.com/
2. DOLFiduciaryRuleExplainedasofJuly5th,2017.Investopedia.Retrievedfromhttp://www.investopedia.com/updates/dolfiduciaryrule/#ixzz4eohksXqf
3. LaborSecretaryAcostaConcedesFiduciaryRuleCannotBeLegallyStoppedBeforeJune9th.Forbes.Retrievedfrom
https://www.forbes.com/sites/jamiehopkins/2017/05/23/laborsecretaryacostaconcedesfiduciaryrulecannotbelegallystoppedbeforejune9th/#74d3e7f41e82
4. CaseyQuirkanalysis.Deloitte
5. Cybersecuritystocksjumpaftermajor'WannaCry'attack.CNBC.Retrievedfromhttp://www.cnbc.com/2017/05/15/cybersecuritystockssurgeonfearswannacry
cyberattackisntover.html
6. NewIntegrations.Robinhood.Retrievedfromhttp://blog.robinhood.com/news/2015/11/20/newintegrations
7. Addeparraises$140million.Finextra.Retrievedfromhttps://www.finextra.com/pressarticle/69579/addeparraises140million
8. VanguardIsGrowingFasterThanEverybodyElseCombined.TheNewYorkTimes.Retrievedfromhttps://www.nytimes.com/2017/04/14/business/mutfund/vanguard
mutualindexfundsgrowth.html
9. AtBlackRock,MachinesAreRisingOverManagerstoPickStocks.TheNewYorkTimes.Retrievedfrom
https://www.nytimes.com/2017/03/28/business/dealbook/blackrockactivelymanagedfundscomputer
models.html?hp&action=click&pgtype=Homepage&clickSource=storyheading&module=firstcolumnregion&region=topnews&WT.nav=topnews&_r=1
10. SurvivaloftheFittest:DefiningFutureLeadersinAssetManagement.CaseyQuirk.Retrievedfromhttp://www.caseyquirk.com/whitepapers.html
11. BlackRockToBuyFutureAdvisor,SignalingRoboAdviceIsHereToStay.Forbes.Retrievedfromhttps://www.forbes.com/sites/samanthasharf/2015/08/26/blackrockto
buyfutureadvisorsignalingroboadviceisheretostay/#7328c3603023
12. OwnersAdvisorybyMacquarietoprovidecustominvestmentadviceonline.Macquarie.Retrievedfrom
http://www.macquarie.com/ph/about/newsroom/2016/ownersadvisorybymacquarietoprovidecustominvestmentadviceonline
13. 2016AnnualReport.CharlesSchwab.Retrievedfromhttps://www.aboutschwab.com/investorrelations/annualreport
14. WealthfrontReview2017:Fees,Returns,InvestingServices&Competitors.BusinessInsider. Retrievedfromhttp://www.businessinsider.com/wealthfrontreview
15. BettermentReview2017:Fees,Returns,InvestingServices&Competitors.BusinessInsider. Retrievedfromhttp://www.businessinsider.com/bettermentreview
16. VanguardRollsOutNewRoboHybridAdvisorServiceWith$17BillionInAssets.Forbes.Retrievedfrom
https://www.forbes.com/sites/janetnovack/2015/05/05/vanguardrollsoutnewrobohybridadvisorservicewith17billioninassets/#142e01d545c0
17. TheVanguardCyborgTakeover.Bloomberg.Retrievedfromhttps://www.bloomberg.com/news/articles/20160324/thevanguardcyborgtakeover
18. Top5RoboAdvisorsin2017.Investopedia.Retrievedfromhttp://www.investopedia.com/tech/toproboadvisors/

Introduction Findings Uncertainties EndStates Conclusion 146

Section3.6
EquityCrowdfunding

WORLDECONOMICFORUM|2017 147
EQUITYCROWDFUNDING| INTRODUCTION

Equitycrowdfundinghasgreatlyevolvedinthelastseveralyears.Thissection
examinesthekeytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawachangeinhowstartupbusinessesraisecapital,withtheentryofnewforcesthatcouldpotentially
changethefutureofventurefundraising

CIRCA2015,THEMAJORFORCESIMPACTINGEQUITYCROWDFUNDINGWERE

MassCrowdfunding ExpertLedCrowdfunding CrowdfundingasaService

UKbasedcrowdfundingplatforms Platformsadvertisedexpertbacked Crowdfundingplatformsbeganon

wereopenedtounaccredited roundstosignaltrustworthiness awhitelabelbasis
investorsforthefirsttime

CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFEQUITYCROWDFUNDINGWERE

Couldcrowdfunding
Couldcrowdfunding Howcouldcrowdfunding
platformsprovethat
platformscontinueto platformsattractlarger(i.e.
thewisdomofthe
growabsentsuccessful institutional)investors?
crowdissuperiorto
companyexits?
individualinvestors?

Note:Inthischapter,EquityCrowdfundingisconsideredtobeearlystage/seedinvestmentsinunlistedcompanies.Itdoesnotinclude
crowdfundingmodelssuchaspresalesortherelativelyrecentappearanceofinitialcoinofferings(ICOs)

Introduction Findings Uncertainties EndStates Conclusion 148

EQUITYCROWDFUNDING| OVERVIEWOFFINDINGS

Equitycrowdfundingisgrowing,buttheindustryisstillinitsinfancyand
regulationwilldramaticallyshapeitsfuture

WHEREDIDDISRUPTIONOCCUR?

A Crowdfundingplatformshavegrownrapidly,drivenbystrongdemandfrombothinvestorsand
entrepreneurs

B Thequalityofregulationhasbeenadefiningfactorinthesuccessoftheequitycrowdfunding
ecosystem

WHEREHASDISRUPTIONNOTOCCURRED?

Thecrowdhasprovenlesswisethanexpected,highlightingtheneedforfurthereducationand
C commercialduediligencetoolstoassistinvestors

Equitycrowdfundingremainsdisconnectedfromthebroaderfinancialsystem,limitingitslongterm
D
scalability

Introduction Findings Uncertainties EndStates Conclusion 149

EQUITYCROWDFUNDING|FINDINGA

Crowdfundingplatformshavegrownrapidly,drivenbystrongdemandfromboth
investorsandentrepreneurs
Theventurefundraisingmarketismorecompetitivethanever,drivenbyagrowingnumberofstartupsandprivatemarketinvestors
seekingalternativestoventurecapital

SUPPORTINGEVIDENCE

Establishedstartups,findingamoreliquidventurecapitalmarket,arechoosingtoremainprivatefor
StrongPrivate
longertoavoidburdensomedisclosuresandmarketscrutiny.Thisdelayhasresultedingreaterreturns
MarketReturns
flowingtoprivateinvestors,ultimatelydrivingotherstolookforopportunitiestoparticipateinthearea

LowSeedStage Venturecapitalistsarepayingmoreattentiontothegrowingpoolofprivatecompanieswithvaluations
FundingRates above$1billion,andoverlookingsmallerfirms,creatingastrongneedforseedcapitalfromindividuals

Shiftingattitudestowardsentrepreneurshipandtheavailabilityofnewtechnologiesthatlowerbarriersto
Risein
entryforstartupshaveresultedinanexplosioninthenumberoftechbasedstartups,drivingtheneed
Entrepreneurship
foradditionalsourcesoffunding

Introduction Findings A B C D Uncertainties EndStates Conclusion 150

EQUITYCROWDFUNDING|FINDINGA

Crowdfundingplatformshavegrownrapidly,drivenbystrongdemandfromboth
investorsandentrepreneurs(continued)

CASESTUDIES QUANTITATIVEEVIDENCE
GrowthofEquityCrowdfunding
AssetClass 3YearCAGR3 %(20122015) %ofAssets

FixedIncome 6 27
Participationof Investalongside
unaccreditedinvestors prominentinvestors
Solutions 12 11
AUKplatformlaunchedin2012,Seedrs Foundedin2010,AngelListisaUS HedgeFund/
13 7
allowsalltypesofinvestorstoinvestas platformforaccreditedinvestors RealEstate
littleas10inastartup.Firmslistedon investingalongsideprominentangel
Equity 15 30
Seedrsraised85millionin2016(up investors.AngelListraised$190million
33%vsthepreviousyear),funding159 in2016(up17%vsthepreviousyear)
PrivateEquity 29 2
dealswith45,000individual andinvestedin460startupswithfunds
investments.1 Theaverageinvestor fromover3,500investors.2 Equity
249 <0.1
demonstratedstrongplatform Crowdfunding
engagementwithnineinvestments. Equitycrowdfundingisgrowingrapidly,butisstill
averysmallmarket
KEYUNCERTAINTIES

Theindustryismaturing,albeitslowly,asindividualinvestorsembracepreviouslyinaccessibleinvestmentopportunities

1 Howwouldincreasedinvestor 2 Howwilldistributedfundraising 3 Asmorecapitalflowstoequity

riskaversionimpactdemandfor sourcesusingblockchain crowdfunding,howwillthis
privateequity? technologyaffectthemarketfor affectventurecapitalfirms?
equitycrowdfunding?

Sources:1.SeedrsBlog2.AngelList3.CaseyQuirkanalysis

Introduction Findings A B C D Uncertainties EndStates Conclusion 151

EQUITYCROWDFUNDING| FINDINGB

Thequalityofregulationhasbeenadefiningfactorinthesuccessoftheequity
crowdfundingecosystem
Newregulationsaroundtheglobearehelpingtostructureandaddtransparencytothecrowdfundingindustry,as regulatorsattemptto
balanceinvestorprotectionwithadesiretomakeplatformsanattractiveandaccessiblesourceofcapital

SUPPORTINGEVIDENCE

Relaxed Manyregulatorsareencouragingtheindustrybyrelaxingprivatemarketsuitabilityrequirementstoallow
Suitability nonaccreditedinvestorstoparticipate.Thisensuresthatlimitsagainstinvestmentsizesandwealthlevels
Requirements donotunreasonablylimitthepoolofpotentialcapital

Regulatorshavegenerallytakenalighttouchapproachwithrespecttodisclosurerequirements,allowing
Differing
foraprocesssignificantlylessonerousthanforpublicfirms.However,certainjurisdictionshaveimposed
Disclosure
harsherrules,deterioratingthecaliberofstartupsonplatformsasonlythosetrulydesperateforcapital
Requirements
putthemselvesthroughsuchaprocess

Crowdfundingregulationshavedivergedgloballyasdifferentjurisdictionsviewequitycrowdfundingvery
Regulatory
Divergence differently,andthustreatitsriskprofiledifferently.Thishamperstheabilityofplatformstoexpandand
operateinternationally

Limited RegulatorshavecappeddealsizestoallowplatformstoleadSeedandArounds.Ifsettoolow,theserisks
DealSize significantlyreducecrowdfundingsvaluetoentrepreneursseekinglargerfundingrounds

Introduction Findings B B C D Uncertainties EndStates Conclusion 152

EQUITYCROWDFUNDING| FINDINGB

Thequalityofregulationhasbeenadefiningfactorinthesuccessoftheequity
crowdfundingecosystem(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

EquityRegulationsbyCountry6

Crowdfundingenthusiast Crowdfundingcomplianceutility
turnedtoalternatives
Nonqualifiedinvestors
Suitability mayinvestupto10%of Accredited
Pebbleisasmartwatchstartupthat CrowdEngineprovideswhitelabel
Requirements theirnetassets investorsonly
raisedover$10millioninnonequity compliancetoolstostreamlineinvestor
crowdfundingonKickstarter(funding accreditation,duediligenceandcore
Startups Platforms
wasraisedonapresaleratherthan backofficeprocessesforcrowdfunding must needto
equitybasis).4Pointingtoburdensome websites.Theplatformincorporates Disclosure release certifythat No
disclosures,Pebblechosetoraiseits cloudbasedautomationtechnologyto Requirements audited disclosures regulation
nextroundof$15millionfrom maketheprocess100%digital, financial are
statements accurate
traditionalinvestorsasopposedto increasingthequalityofduediligence
equitycrowdfunding. andthusinvestorstrustinplatforms.5 Fundraising
$1M 5M Nolimit
Limit

KEYUNCERTAINTIES

Crowdfundinghasbeenmostsuccessfulinmarketsthatbalanceearlymarketgrowthwithinvestorprotections

1 Whatwillbethenextregionto 2 Willregulationconvergetoa 3 Howwillgovernmentsbalance

createequitycrowdfunding specificstandardthatallowsfor crowdfundingplatformgrowth
regulation? thedevelopmentofinternational withconsumerprotection?
crowdfundingmarkets?

Sources:4.NationalBureauofEconomicResearch5.CrowdFundingBeat6.EuropeanCommission,TheAsianBusinessLawyer

Introduction Findings B B C D Uncertainties EndStates Conclusion 153

EQUITYCROWDFUNDING| FINDINGC

Thecrowdhasprovenlesswisethanexpected,highlightingtheneedforfurther
educationandcommercialduediligencetoolstoassistinvestors
Thecrowdhasdrivenvaluationshigherthanthoseseeninventurecapitalmarkets,creatingtheriskthatinvestorsbecomedisillusioned
duetodisappointingreturnsinthefuture

SUPPORTINGEVIDENCE

Unlikeangelandventurecapitalinvestors,crowdfundingplatformsdonothavetheinstitutional
LackofResources
knowledgeandtimetoinvestasizeableamountofeffortinduediligence,insteadperformingsimpler
andTime
diligenceandrelyingonthewisdomofthecrowd

Manylargeplatformsallownonaccreditedinvestorstoparticipateinequityfundraising.Those
Inexperienced
inexperiencedinvestorsdrivevaluationshighinearlyroundsandaremorelikelytoinvestinlessviable
Investors
startups,creatingproblemsinlaterrounds.Moreover,investorspersonalaffiliationswithbrandscan
oftenplayanoutsizedroleintheirinvestmentdecisions

ThereisstronginterestinleveragingnewformsofdataandthepowersofautomationandAItoperform
AIandCognitive
commercialduediligence,analogoustothecreditanalysisperformedbylendingmarketplaces
Solutions

Introduction Findings B C C D Uncertainties EndStates Conclusion 154

EQUITYCROWDFUNDING| FINDINGC

Thecrowdhasprovenlesswisethanexpected,highlightingtheneedforfurther
educationandcommercialduediligencetoolstoassistinvestors(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

RevenuesvsValuationsforThree
UKBreweries(million)9
305 Revenue Valuation
Overvaluedbrewery? Investorledduediligence
oncrowdfunding
BrewDog,aScottishcraftbrewery, SyndicateRoompioneeredtheinvestor
leveragedbrandadvocatestohavethe ledmodel,whereinvestmentrounds
mostsuccessfulequitycrowdfunding areledbyprofessionalswhovalidate 66
campaigntodate(raisingover15 theinvestmentopportunitybyleading 50
30 32
9
millionin2016).However,itsvaluation thefundingroundwiththeirown
wasalmost10timeshigherthansimilar money.Onlineinvestorsthenjoinin
Brewdog Camden Adnam's(Public)
breweries,andconcernshavebeen underthesameeconomicterms.8 (Crowdfunded) (Crowdfunded)
raisedaboutinaccuraciesin
promotionalmaterials.7 Fundedstartupspricedmuchhigherthan
publiclytradedstartups
KEYUNCERTAINTIES
Startupsareraisingcapitalatmuchhighervaluationsoncrowdfundingplatformsthanthroughtraditionalsources,raisingconcernsaboutthe
accuracyofcrowdfundingvaluations

1 Howcancrowdfundingplatforms 2 Willthewisdomofthecrowd 3 Whatnewtechnologiesand

bestprovideeducationaland modelcontinue,orwillthe sourcesofdataaremostvaluable
commercialduediligencetoolsto investorledmodeleventually toimprovetheaccuracyof
empowerinvestors? takeover? pricing?

Sources:7.TheTelegraph8.SyndicateRoom9.Forbes

Introduction Findings B C C D Uncertainties EndStates Conclusion 155

EQUITYCROWDFUNDING| FINDINGD

Equitycrowdfundingremainsdisconnectedfromthebroaderfinancialsystem,
limitingitslongtermscalability
AlthoughcrowdfundingisanincreasinglymeaningfulpartoftheSMEfundinglandscape,itsmomentumhasrecentlyslowed.Tosustain
growth,platformsneedtobroadentheirdistributionstrategiestoinstitutionalfunding

SUPPORTINGEVIDENCE

Duetotheimmaturityoftheplatformsandthelackofanestablishedtrackrecord,investorshavelimited
Limited
abilitytogaugetherisksandreturnexpectationsoftheirinvestments.Thus,theyarereluctanttoinvest
TrackRecords
or,inmanyjurisdictions,arelimitedbyinvestorprotectionlaws

Earlystageventurecapitalinvestmentsarehighlyilliquid,withinvestorsunabletorealizeareturnuntil
LackofLiquid thecompanygoespublicorissold oftenyearsaftertheinitialinvestment.Aliquidsecondarymarket
Secondary
wouldallowinvestorsanopportunitytoexit;italsocreatessignalingissuesforthestartups,asstock
Markets
temporarilytradingdowncouldimpactthebusinesssprospectofraisingfutureroundsofinvestment

Researchingandinvestinginindividualstocksislargelyacottageindustryforretailinvestors,asthe
Demandfor
PooledProducts majorityofindividualsdesirethesimplicityandaccessibilityofpooledproducts.Platformshavenotyet
developedmoreaccessibleproducts,andcouldworkwithassetmanagerstodoso

Wider Themajorityofwealthisinvestedthroughfinancialadvisers(bothautomatedandhuman)andnot
Distribution throughdirectchannels.Equitycrowdfundingplatformshavenotyetaccessedwealthmanagement
Networks distributionchannels

Introduction Findings B C D D Uncertainties EndStates Conclusion 156

EQUITYCROWDFUNDING| FINDINGD

Equitycrowdfundingremainsdisconnectedfromthebroaderfinancialsystem,
limitingitslongtermscalability(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

EquityCrowdfundingTrackRecord(20112016)12
NumberofFirms Description

Secondarymarketlaunch Assetmanagerpartnership Exits 5 Successfulexits

withinstitutionalplatform
Firmsreraisedata
InJune2016,Crowdcubeannouncedits InDecember2016,iCapitalreceivedan Rising 216 highervaluation
planstolaunchasecondarymarketthat investmentfromBlackRock,highlighting
thestartupsdesiretopartnerwith Firmsarecontinuing
enablesinvestorstotradecrowdfunded Sustaining 567 activities
securities.Theplatformhasalso incumbentsforscaleandthemarket
committedtobuildingproductsand leadersinterestininvestinginnew Firmshavefailedorare
Failing 167
servicesthatallowstartupstoimprove entrants.iCapitalconnectsaccredited failing
transparencyandbettermanageequity investorsandtheiradviserstoprivate
investors.10 equityandventurecapitalfunds
Theindustryhasnothadtimetosuccessfullyexitmany
throughadigitalfirstprocess.11 firmsandestablishatrackrecord

KEYUNCERTAINTIES

Whiletheequitycrowdfundingmodelhasprovenworkable,theindustryneedstodemonstratescaleandperformanceinordertobeviable

1 Whatwillthetrackrecordof 2 Howimportantaresecondary 3 Howcanplatformscollaborate

equitycrowdfundinginvestments marketsforattractingnew withprofessionalmanagersto
beoverthenextfiveyears? investors,andwhattechnologyis developproductsandaccess
neededtoenablesuchmarkets? distributionnetworks?

Sources:10.Forbes11.BusinessWire12.AltFiData

Introduction Findings B C D D Uncertainties EndStates Conclusion 157

EQUITYCROWDFUNDING| KEYUNCERTAINTIES

Fiveuncertaintieswilldeterminetowhatdegreetheindustrycandemonstrate
stabilityandlegitimacywhilecontinuingtogrow

1 WHATWEKNOW Thefourequitycrowdfundingfindingsillustratetheriseindemandforcrowdfundingplatforms,theimperativeroleof
regulationoncrowdfundingsuccess,thechallengesfacedwiththelackofinvestorknowledge,andthedifficultyof
equitycrowdfundingtointegrateintothebroaderfinancialecosystem.

Throughthesefindings,thefollowingkeyuncertaintiesaroundthefutureofequitycrowdfundingemerged:

2 UNCERTAINTIES

Howcanplatforms Whatpartnerships Howwillregulators Howwillratesof Willshiftingmarket

useemerging areimportantto balanceinvestor entrepreneurship conditions(e.g.
technologies(e.g.AI developingnew protectionwith evolveas risinginterestrates)
andmachine productsand ensuringthat macroeconomic significantlyimpact
learning)toeducate expanding platformsremainan conditionschange investordemandfor
investorsand distribution? attractivesourceof andindustries earlystageequity?
providedue capital? mature?
diligencetools?
3 POSSIBLEFUTURES

Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureoftheequitycrowdfunding
industry:

SocialDriver InternationalExpansion ShootingStar

Introduction Findings Uncertainties EndStates Conclusion 158

EQUITYCROWDFUNDING| POTENTIALENDSTATES

Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms

INTERNATIONAL
SOCIALDRIVER EXPANSION SHOOTINGSTAR

Thefirstendstatepaintsaworld Thesecondendstatepaintsa Thethirdendstatepaintsaworld

where: worldwhere: where:
Equitycrowdfundingforprofit Regulationsacrossjurisdictions Continuedlowinterestrate
orientedcompaniesnever arestandardized environmentsdrivewealth
achievesprofitability managerstoseekyield
Platformsstartexpanding
Socialimpactoriented internationally Partnershipswithequity
crowdfundingbuildsonthe crowdfundingplatformsare
Newtechnologiesallowinter
successofdebtinstruments developed
platformconnectivity
likesocialimpactbonds
AIandautomationisusedto
Secondarymarkettrading
Platformsdifferentiate analysefirmsandinvestments
allowsplatformstoattract
themselvesbasedonsocial
additionalinvestorsandgrow Thecrowdfundingmarket
returnsandaffinitygroups
growsconsiderablyas
Projectsgetsourcesof institutionalmoneyarrives
communitysupportand
feedback

Introduction Findings Uncertainties EndStates Conclusion 159

EQUITYCROWDFUNDING| ENDSTATEONE

Platformsfailtoscaleinprofitorientedindustries,butcatchonas
vehiclestodeliversocialimpact

1 3
Equitycrowdfundingfor
profitorientedcompanies
neverrivalsventurecapital
andangelinvestors;
however,itcatchesonasa
wayofinvestinginequity
forsociallyworthwhile
causes
Unabletoscale,platforms
neverbecomeprofitable, Socialprojectsgetvaluable
butgetgovernment communitysupportand
supportthroughgrantsand Platformsdifferentiate feedback,allowingthe
taxprogrammes themselvesbasedon ecosystemtoflourish
degreesofsocialand
financialreturnsandtheir
affinitygroup,aswellason
customerengagementand
2 degreeofduediligence 4

CRITICALCONDITIONS EARLYSIGNS
Venturecapitalfundsremainthedominantsourceofearlystage Highvaluationsand/orpoortrackrecordsstifleplatformgrowth
startupfunding anddriveinvestorsawayfromtheindustry
Thenumberofinvestorsinterestedinprovidingequitytosocial Poorequitycrowdfundingregulationsarenotfixed
enterprisesgrows
Qualitystartupsturnawayfromthecrowdfundingplatformand
Governmentsupportforplatformscontinuesthroughgrantsand optforventurecapitalfundinginstead
taxadvantages

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 160

EQUITYCROWDFUNDING| ENDSTATEONE
Socialenterprisesattractmorefundingandaremoreimpactfulastheecosystem
becomesdevelopedanddedicated
ImplicationsforIndividualInvestors
Individualinvestorsreceiveaccesstoa
platformtoinvestequityinsocialcauses
theytrulycareabout
Theygivevaluableinputtoaffinityand
socialfocusedprojectsthatothersources
ofinvestmentdonotprovide
Introduction Findings Uncertainties
SocialDriver
ImplicationsforIncumbents ImplicationsforEntrepreneurs
Angelinvestorsandventurecapitalfirms Startupsprovidingasocialgoodhave
remainthedominantsourceofinvestment increasedaccesstocapital
forprivateequity
Startupsoperatinginlesspopularsectors
forventurecapitalhavefewerfunding
sources,and/orarelocatedinlessliquid
venturecapitalmarkets
EndStates 1 2 3 Conclusion 161
EQUITYCROWDFUNDING| ENDSTATETWO

Regulatorconvergenceallowsforcrossborderinvestmentand
crowdfundingplatformgrowth

1 internationally,allowing
Obviousmarketsuccessin
certainjurisdictionsdriven
byregulationdrives
regulatorsinother
jurisdictionstofollowsuit
andstandardizeequity
crowdfundingrules
Platformsstartexpanding
investorsinonejurisdiction
toinvestinothers,thereby
increasingthepoolof
potentialinvestorsforthe
topstartups
2 4
3 Withthemarket'sgrowth,
anascentsecondary
marketcanevenbe
Platformsinvestin establishedforthemost
technologiesthatallowfor successfulcrowdfunded
interplatformconnectivity firms
andsaferecordkeeping,in
ordertoencouragecross
platforminvestments

CRITICALCONDITIONS
Increasedcollaborationbetweencrowdfundingplatformsand
regulatorsacrossjurisdictionswillhelpcreatestandardized
regulationforequitycrowdfunding
Investmentintechnologyleadstobuildinginterplatform
connectivityandduediligencetoolsforinvestors
EARLYSIGNS
Increasedpressuretoregulatetheindustryresultsinnew
regulationsandimprovedinvestorconfidenceinplatforms
Interestgrowsforfirmsinemergingmarketstousecrowdfunding
becauseoflimitedventurecapitalopportunities,andforinvestors
inmaturemarketstoinvestinthem
Newtoolsemergethatallowinvestorstoconductduediligence

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 162

EQUITYCROWDFUNDING| ENDSTATETWO
Internationalexpansionbycrowdfundingplatformslevelsaccesstoventure
capitalacrossgeographies
ImplicationsforIndividualInvestors
Investorshaveincreasedaccesstoboth
domesticandglobalequityopportunities
Portfoliodiversificationisimprovedby
addinghighriskandpotentiallyhigh
returnglobalinvestments
Introduction Findings Uncertainties
International
Expansion
ImplicationsforIncumbents ImplicationsforEntrepreneurs
Thenumberoflaterstageemerging Improvedaccesstoearlystagecapitalin
marketinvestmentopportunitiesavailable marketstraditionallyunderservedby
toventurecapitalfundsgrowsasequity venturecapitallevelstheplayingfield
crowdfundingsupportsfirmsthrough betweenestablishedandemerging
earlystagegrowth markets
Increasedcompetitionforventurecapital
firmsisfocusedonunderdeveloped
markets
EndStates 1 2 3 Conclusion 163
EQUITYCROWDFUNDING| ENDSTATETHREE

Crowdfundingplatformsforgepartnershipsandgainscaletosuccessfully
leadlatestageofferingstraditionallydonebyventurecapitalfirms

1 automationandAItoassist
Acontinuinglowyield
environmentdriveswealth
managerstopartnerwith
platforms.Theecosystem
developsnewproductsand
accessesestablished
distributionchannels
(includingroboadvisors)
Platformsinvestin
startupswithpreparing
disclosures,andmake
commercialduediligence
availabletoinvestorsat
lowcost
2 largerofferings
Platformsgrow
3 considerably,especiallyfor
earlystageinvestments,
andevencompetewith
venturecapitalfirmsin
PlatformsfocusontheB2B
severalmarkets especially
marketandrelegatethe
whereventurecapitalis
B2Cchanneltoprototyping
weak
newfeatures.Platforms
growandimproveliquidity,
allowingthemtolead
4

CRITICALCONDITIONS EARLYSIGNS
Aprolongedlowreturnenvironmentleadswealthmanagersto Earlytentativepartnershipsbetweenwealthmanagersand
lookforotherhigheryieldopportunities platformsaresuccessful
Technologystartupsdevelopadvancedanalyticstoolsthathelp Technologystartupsemergethatfocusonimprovingtheearly
wealthmanagersperformduediligence stageduediligenceprocess
Platformsdemonstratesomeearlysuccessesandbuildtrack
records
Regulatorsacceptpartnershipswithwealthmanagers

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 164

EQUITYCROWDFUNDING| ENDSTATETHREE

Crowdfundingplaysanincreasinglylargeroleforseedstagefunding,butindividual
investorsonlyinteractwithcrowdfundingthroughtheirwealthmanagers

ShootingStar

ImplicationsforIndividualInvestors ImplicationsforIncumbents ImplicationsforEntrepreneurs

Investorsgaintheabilitytoallocateto Crowdfundingplatformsgainscale Bothearly andlatestagestartupshave

highrisk,highreturncrowdfundedequity
Engagementintheinvestmentselection
processdecreasesduetointermediation
Earlystageequitybecomesacommon
sourceofdiversification
throughpartnershipwithwealthmanagers
Duediligencetechnologyleadstohigher
qualityopportunitiesthroughbetter
detectionofbadeggs
Venturecapitalfirmsfocusonlaterstage
opportunitybecauseofincreased
competitionattheseedstage
improvedaccesstoventure
capital/liquidity
Barriersarelowerwhenaccessing
platformsbecauseduediligenceis
cheaper(handledbyplatforms),butmore
informationisneededtopassdue
diligence

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 165

EQUITYCROWDFUNDING| CONCLUSION

Keytakeawaysforfinancialinstitutions

IMPROVEDLIQUIDITYATSEEDSTAGE
1
Leadingcrowdfundingplatformswillincreasetheamountofseedstagefundingavailableto
entrepreneurs,thusfillingavaluablenicheinthefundraisingecosystem,especiallyinpartsoftheworld
withlessventurecapitalinvestment

REGULATORBALANCE
2
Regulationplaysasignificantroleinshapingtheequitycrowdfundingindustryacrossallpossibleend
states,whethercrowdfundingplatformsgodirecttoconsumersorpartnerwithincumbents.Regulators
mustbalanceencouragingcrowdfundingandensuringadequateduediligence

INTEGRATIONWITHBROADERFINANCIALECOSYSTEM
3
Inordertoachieveasustainablelevelofscale,equitycrowdfundingplatformswillneedtogrowtheir
scopeoffundingthroughintegrationwiththebroaderfinancialecosystem(e.g.incorporationintowealth
managementplatforms)andwillneedtoestablishsecondarymarketswithsufficientliquidity

Note:Duetotheirrelativerecency,ICOswerenotinthescopeofthisinitiative,buttheyrepresentanewmechanismforcrowdfundingthat
warrantsfurtherresearch

Introduction Findings Uncertainties EndStates Conclusion 166

EQUITYCROWDFUNDING|REFERENCES

References

1. Crowdfundingtopsprivateequityinvestmentsfor2016,withSeedrsleadingthecharge.SeedrsBlog.Retrievedfromhttps://www.seedrs.com/learn/blog/crowdfunding
topsprivateequityinvestmentsfor2016withseedrsleadingthecharge
2. "AngelListFAQ".AngelList. Retrievedfromhttps://angel.co/help
3. ProprietaryanalysisbyCaseyQuirk
4. SomeSimpleEconomicsofCrowdfunding.AjayAgrawal,ChristianCataliniandAviGoldfarb,inInnovationPolicyandtheEconomy,Vol.14,fromtheNationalBureauof
EconomicResearch.Retrievedfromhttp://www.nber.org/chapters/c12946.pdf
5. CrowdEngineFirsttoOfferRegulationCFCrowdfundingSoftware.CrowdFundingBeat.Retrievedfromhttp://crowdfundbeat.com/2016/05/14/crowdenginefirstto
offerregulationcfcrowdfundingsoftware/
6. UnderstandingCrowdfundinganditsRegulations.EuropeanCommission.Retrievedfrom
http://publications.jrc.ec.europa.eu/repository/bitstream/JRC92482/lbna26992enn.pdf;EquityCrowdfundinginChina:CurrentPracticeandImportantLegalIssues.The
AsianBusinessLawyer,Vol.18.Retrievedfromhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=2842752
7. WillinvestinginBrewDogevermakeyoumoney?.TheTelegraph.http://www.telegraph.co.uk/business/2016/04/09/willinvestinginbrewdogevermakeyoumoney/
8. SyndicateRoomFAQ.SyndicateRoom.Retrievedfromhttps://www.syndicateroom.com/faqs
9. ValuationsInCrowdfunding:AreWeAllBarkingMad?".Forbes. Retrievedfromhttps://www.forbes.com/sites/goncalodevasconcelos/2015/05/27/valuationsin
crowdfundingareweallbarkingmad/#47d493665424
10. CrowdcubePlansSecondaryMarketForEquityCrowdfunding.Forbes. Retrievedfromhttps://www.forbes.com/sites/davidprosser/2016/07/21/crowdcubeplans
secondarymarketforequitycrowdfunding/#6885227e2991
11. BlackRocktoInvestiniCapitalNetwork.BusinessWire.Retrievedfrom:http://www.businesswire.com/news/home/20161215006121/en/BlackRockInvest
iCapital%C2%AENetwork
12. Wherearetheynow2016.AltFiData.Retrievedfromhttp://www.altfi.com/download/Where_are_they_now_2016

Introduction Findings Uncertainties EndStates Conclusion 167

Section3.7
MarketInfrastructure

WORLDECONOMICFORUM|2017 168
MARKETINFRASTRUCTURE| INTRODUCTION

Marketinfrastructurehasgreatlyevolvedinthelastseveralyears.Thissection
examinesthekeytrendsshapingtheindustryandtheuncertainpathforward
Thefirsthalfofthisdecadesawthebeginningofrapidchangeintheinfrastructureunderlyingcapitalmarkets,withtheglobalentryof
severalinnovativeforcesthathadthepotentialtochangehowtransactionswereconducted

CIRCA2015,THEMAJORFORCESIMPACTINGMARKETINFRASTRUCTUREWERE

CapitalRequirements NewPlatforms MarketRegulations

BaselIIIcapitalrequirements Technologicallyenabledplatforms LedbyEurope,manyregions

challengedtheengagementmodels werestartingtoappearin implementedadditionalcontrols
oftraditionalsellsidefirms traditionaloverthecounterdriven aroundtheexchangeofassets
markets

CIRCA2015,THEBIGUNCERTAINTIESABOUTTHEFUTUREOFMARKETINFRASTRUCTUREWERE

Howwouldelectronic Whateffectwould Howwouldincumbents

platformsdevelop,and continuedregulationhave seektorespondtonew
whatassetswouldbe onthedevelopmentof technologiesusedby
electronified? newtradingtools? startups?

Note:Inthischapter,a"platform"isanelectronicenvironmentthatfacilitatestradingoffinancialproductsbyofferingoneormore
servicesalongthecontinuumfrompricediscoverytoposttradesettlement

Introduction Findings Uncertainties EndStates Conclusion 169

MARKETINFRASTRUCTURE| OVERVIEWOFFINDINGS

Theroleofplatformsincapitalmarketsisgrowing,ifunevenly,butregulatory
changesandnewtechnologywillinfluencetheiradoptionandcapabilities

WHEREDISRUPTIONOCCURRED

A Traditionaloverthecounter(OTC)productscontinuetheirjourneytowardselectronification,drivenby
regulationandthepromiseofimprovedeconomiesofscale

B Theeffortsofelectronicplatformstoscaleuparecomplicatedbyanuncertainandregionally
fragmentedregulatoryenvironmentandpoliticalinstability

C Marketinfrastructureprovidersaredisruptingthemselvestopreserveapivotalroleinfutureprocesses
andunlocknewrevenuestreams

WHEREDISRUPTIONDIDNOTOCCUR

D Newmarketplatformshaverarelychallengedincumbents,andinsteadseejointventuresand
partnershipsasthemostsuccessfulpathtoscalingup

Introduction Findings Uncertainties EndStates Conclusion 170

MARKETINFRASTRUCTURE| FINDINGA

TraditionalOTCproductscontinuetheirjourneytowardselectronification,drivenby
regulationandthepromiseofimprovedeconomiesofscale
TheelectronificationoftraditionalOTCassetclasses(e.g.fixedincome),hascontinuedinrecentyears,followingthepathofequity
markets.However,thisprocesshasbeenunevenwithsomeproducttypesmovingawayfromOTCfasterthanothers

SUPPORTINGEVIDENCE

Platformsarecollectingdemand/supplydatatocreateanaggregatedmarketviewandaiddiscoveryof
Dataand suitablecounterparties,andareevenprovidingadditionalmarketanalyticstobetterinformbuyers,sellers
Standardization andintermediaries.However,securingdatastandardsandcrossplatforminteroperabilityremainskeyto
avoidfragmentationandsecureliquidityduringtheelectrificationprocess

Somepostfinancialcrisisregulationshaverequiredparticularassetclassestomovetheirtradeandpost
tradeprocessestotradingplatforms(e.g.interestrateswaps).Otherregulationshaveprovidedindirect
RegulatoryPush
nudgestowardstradingplatforms,suchastheEuropeanUnionsSecondMarketsinFinancialInstruments
Directive(MiFIDII),increasingthecostoftraditionalOTCtradingunderthebestexecutionimperative

Certainassetclasseshavecharacteristicsthatnaturallymakethembettersuitedfortradingplatforms.
AssetClass Productsthatarerelativelyhomogenousandhavelowtradesizesareparticularlygoodfitsfortrading
Characteristics platforms,andhavemigratedquickly.Assetclassesthatlackthosecharacteristicshavestruggledtoreach
acriticalmassofsupplyanddemandonthemarketplacelevel

Introduction Findings A B C D Uncertainties EndStates Conclusion 171

MARKETINFRASTRUCTURE| FINDINGA

TraditionalOTCproductscontinuetheirjourneytowardselectronification,drivenby
regulationandthepromiseofimprovedeconomiesofscale(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

ElectronificationofVarious
AssetClasses(%)3

80%
Betonbondelectronification Moveintoregulatedtradeexecution 80% 50% 70% 70%
60%
60%
InJuly2017,DeutscheBrseGroup Bloombergisinthefinalstageof 2015
40%
hasboughta$10mstakeinTrumid,a shiftingtradingincashbondsand 25% 2012
youngbondtradingplatform.Trumids derivativesfromitsexistingAllQ 20%

platformfocusesonbringing platformtotheBloombergTrading 0%
electronictradingtocorporatedebt, Facility,whichlaunchedin2015and
anassetclasswheremosttrading isthecompanysfirstregulated
todayisstillconductedoverthe Europeanvenue.2 TheAllQplatform
phone1. accountedfor37%ofEuropean
governmentbondtradesinlate2016.
Thelevelandgrowthofelectronificationacross
assetclassesvariesconsiderably
KEYUNCERTAINTIES

Whilethemovetoelectronicplatformshasbeenuneven,itwilllikelycontinueinthepushfortransparencyandliquidity

1 Howcanstrongercrossplatform 2 Willregulatorsfurtherexpand 3 Canbuysidefirmsadjusttothe

cooperationbeachievedto thescopeofassetclasseswhich requirementsofdirectplatform
furtherimproveaccesstoolsand needtobetradedviaelectronic access,disintermediatingthesell
standardizemarketlanguage? tradingplatforms? side?

Sources:1.FinancialTimes2.FinancialNews3.BIS

Introduction Findings A B C D Uncertainties EndStates Conclusion 172

MARKETINFRASTRUCTURE| FINDINGB

Theeffortsofelectronicplatformstoscaleuparecomplicatedbyanuncertainand
regionallyfragmentedregulatoryenvironmentandpoliticalinstability
Postfinancialcrisisregulationhasgenerallyupheldthethemesofcrossborderequivalence,transparencyandcapitalefficiency,allof
whichsupporttheelectronificationoftrading;however,recenteventsarecallingthistrendintoquestion

SUPPORTINGEVIDENCE

Platformshavebeenabletoachievescalequicklyinthelastfewyearsbytakingadvantageofregulatory
PostCrisis reforms(suchasMiFID,orDoddFrankintheUnitedStates)thatwereenactedinresponsetothefinancial
Regulation crisis.Asthecrisisbecomesarelicofthepast,regulatorybodiesaroundtheworldarestartingtorevisit
financialcrisiserapolicies

Thewidespreadpoliticaluncertaintythatenvelopedmanydevelopedmarketspost2016hasintroduced
Political
newriskstocapitalmarkets,slowinginvestmentsasfinancialinstitutionswaitforclearsignalsonthe
Instability
prioritiesofnewlyformedgovernments

Theglobalregulatorytrendoverthelastfewdecadeshasbeenoneofincreasingglobalinterconnectivity
Regionalization andstandardization,whichbenefittedplatformsjourneystoscale.However,duetogeopoliticalfactors
andtheregionalizationoffinancialecosystems,thetrendforthefutureislikelytoberegionalizationof
regulatorypolicies

Introduction Findings A B C D Uncertainties EndStates Conclusion 173

MARKETINFRASTRUCTURE| FINDINGB

Theeffortsofelectronicplatformstoscaleuparecomplicatedbyanuncertainand
regionallyfragmentedregulatoryenvironmentandpoliticalinstability(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

NumberofBrexitRelatedRisksin
MajorCompanyDisclosures,20166
Newregulatorypath Politicalderiveduncertainty 600

Atthe2017AnnualInternationalFutures
IndustryConference,J.Christopher
Giancarlo,ActingChairmanoftheUS
CommodityFuturesTradingCommission,
laidoutthefutureagendaofthe
regulatorybodybyemphasizingtheneed
torightsizetheregulatoryfootprint,
particularlywithrespecttotheDodd
FrankAct.4 Helaidoutthemain
objectiveasthereductionofexcessive
regulatoryburdens.
KEYUNCERTAINTIES
Theexactimpactofaregulatorypivotoncapitalmarketeconomicsisverydifficulttopredict,butwilllikelyhavealarge (iflocalized)effect
TheimpactofBrexitoncapitalmarkets
isstillunclear.SeveralEUregulators 400
haveindicated5 theywillnotallow
brokersbasedoutsidetheEuropean
EconomicArea(includingapostBrexit
UnitedKingdom)toofferthirdcountry
enduserselectronicaccesstoexchanges
residingundertheEuropeanUnion's
jurisdiction. 10Q(Quarterly) 10K(Endofyear)
Growthofpoliticalinstabilityasamajorissue

1 Willregulatoryprotection,in 2 Willfreedupcapitalflowback 3 Howdoesregionalfragmentation

particularintheUnitedStates, intooldbusinessmodels,orwillit reshapethebusinessmodelsof
triggeraglobalregulatory contributetofurtherplatform platformproviders?
competition? innovation?

Sources:4.CFTC5.Risk.net6.SkaddenArpsSlateMeagher&Flom

Introduction Findings A B C D Uncertainties EndStates Conclusion 174

MARKETINFRASTRUCTURE| FINDINGC

Marketinfrastructureprovidersaredisruptingthemselvestopreserveapivotal
roleinfutureprocessesandunlocknewrevenuestreams
Theindustryhaslongknownthepotentialbenefitsofdisruptivetechnologies,suchasAIanddistributedledgertechnology(DLT),and
hasstartedtoinvestinthedevelopmentofnewbusinessmodelsaroundthosetechnologies

SUPPORTINGEVIDENCE

Astechnologicalimprovementslowereconomiesofscale,theprofitabilityofoperatingautilityis
Erosionof
declining.Additionally,utilitiesareunderpressurefromaprevailinglowinterestrateenvironmentand
Margins
increasingcapitalcosts,causingthemtoexplorenewprofitopportunities

Asprofitabilityincorebusinesseserodes,thedataflowsofincumbentmarketinfrastructureproviders
DataandDataFlow couldcreatenewsourcesofrevenue.However,doingsowillrequireextensiveindustrycooperation
asKeyResources
betweendifferentdataproviders,includingcomplementaryinfrastructureanddatasharingagreements

ValueChain Newtechnologycouldleadtosignificantchangesinthearchitectureofcapitalmarketsbyenablingreal
Disruption timeprocessesandmoredirectconnectivity.Thiscoulddrivetheeliminationofmanyexistingrolesand
Capabilities thecreationofnewones,upendingthetraditionalvaluechain

Introduction Findings A B C D Uncertainties EndStates Conclusion 175

MARKETINFRASTRUCTURE| FINDINGC

Marketinfrastructureprovidersaredisruptingthemselvestopreserveapivotal
roleinfutureprocessesandunlocknewrevenuestreams(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

RevenueGrowthforMajor
USExchanges,20092015(%)9

Infrastructureimprovements
TheDepositoryTrust&Clearing
Corporation(DTCC)isusingblockchain
technologytorebuilditsplatform
responsibleforprocessing$11trillion
worthofcreditdefaultswaps.Thenew
platformwillaimtoalignprocessing
includingexecutionandrisk
managementalongthetradelifecycle,
soastomakeusageandreconciliationof
multipledatabasesobsolete.7
60
Bettingonblockchain
InJune2017ThomsonReuterslaunched
BlockOneIQ,asmartoraclethat
providesuserswithcryptographicproofof
thesourceofexternalsecuritiespricing
data aperquisiteformanysmart 5
contractusecasesofblockchainin
financialservices.Theproductisoneina TransactionalRevenue Information&Technology
suiteofpotentialopportunitiescurrently Revenue
beingexploredtoprovideenabling
servicesforthoseusecases8 Growthininformationrelatedrevenues

KEYUNCERTAINTIES

Newrevenuemodelsareemerging,butunlocking andprofiting fromthemwillrequirecooperationandtime

1 Howfarawayarenew 2 Willdisruptionattractcapital 3 Whatareprerequisitesfor

technologyenabledbusiness heavytechnologyfirmslikeIBM regulatorybuyintonewbusiness
linesfromapplicability,scalability orGoogletotheareasofmarket modelsarounddisruptive
andmaturity? dataandinfrastructure? technologies?

Sources:7.Forbes8.ThomsonReuters9.BusinessInsider

Introduction Findings A B C D Uncertainties EndStates Conclusion 176

MARKETINFRASTRUCTURE| FINDINGD

Newmarketplatformshaverarelychallengedincumbents,andinsteadseejoint
venturesandpartnershipsasthemostsuccessfulpathtoscalingup
Manyfintechshaveenteredthetradingplatformarea(23newcorporatebondplatformsalonebetween2010and2015),butareview of
thesurvivorssuggeststhatamixoffintechtechnologicalinnovationandincumbentscaleisthewinningbet

SUPPORTINGEVIDENCE

Monoline Tradingplatformswithanarrowassetclassorvaluechainfocus(i.e.moststartups)arestrugglingtomeet
Challenges theneedsofincumbents,whooperateinmanydifferentiatedmarketsandthuslookforefficiencyand
crossproductsynergiesfromtheirplatforms

Incumbentbanks,brokersandplatformproviderscanuseavailableresources(bothtalentandfinancial)
Incumbent andtheindustry'shighswitchingcoststotheiradvantage.Ratherthanadoptfintechsolutions,theycan
Adaptation
eitherdeveloptheirownoracquirepromisingstartupstobridgethegap

Evenwhensignificantefficienciesexistonnewtradingplatforms,twofactorshavecreatedastrong
stickinessfortraditionaltradingmethods:thedesireofincumbentstolimittheintegrationofnew
Stickiness
technologyplatformsduetoswitchingcosts,andareluctancetodisturbthecomplexnetworkofindividual
andinstitutionalrelationshipscharacterizingcapitalmarkets

Ongoing Incumbentswhoprovidemarketaccesstoinvestorsremainslowatimprovingcustomerfriendlyandcost
Needfor efficient,technologydrivenrelationshipmodelsduetoinertiaandalackofexpertise.Therefore,fintechs
Improvement representanidealpartnerforenrichingandimprovingcoretechnology,aswellascontinuouslyimproving
customerinterfaces

Introduction Findings A B C D Uncertainties EndStates Conclusion 177

MARKETINFRASTRUCTURE| FINDINGD

Newmarketplatformshaverarelychallengedincumbents,andinsteadseejoint
venturesandpartnershipsasthemostsuccessfulpathtoscalingup(continued)

CASESTUDIES QUANTITATIVEEVIDENCE

DevelopmentofUS FintechRun
SwapExecutionFacilities(SEFs)12

Expansionofjointventure Monolineplatformfailure SEFslaunchedin

4 2013byfintechs
InMarch2017,Euronextannouncedthe In2015,Bondcube,anelectronic
globalexpansionofitsjointventurewith fixedincometradingsystemthathad
SEFslaunchedby
fixedincometechnologyproviderAlgomi.10 justreceivedregulatoryapprovalto
Itwillcreateanetworkofcentralized tradeinEurope,filedforliquidation. 2 fintechs still
operating
informationvenues,turningdisparatedata Accordingtothechiefexecutive 44%
intotradeopportunitiesbetween officer,liquiditywasnottheproblem,
counterpartiesyetmaintainingthecurrent butBondcubelackedthecapabilityto FintechSEF
clienttodealermarketstructure. followthroughfromconverting
>1% marketshare
matchesintotrades.11
Fintechshavestruggledtocapitalizeonthe
regulatorydrivetowardsSEFs
KEYUNCERTAINTIES

Thepopularityofjointventuresandpartnershipsmaymeanthatfuturemarketinfrastructuredevelopmentisslower,albeitmorepredictable

1 Shouldnewfintechplatforms 2 Willthetrendtowards 3 Canamonolineproductoffering

focusdirectlyonbusinessmodels partnershipsleadtofurther beasustainablebusinessmodel
aroundpartneringandfillingB2B consolidationintheplatform forplatformsatall?
gaps? universe?

Sources:10.Algomi11.Bloomberg12.FIA

Introduction Findings A B C D Uncertainties EndStates Conclusion 178

MARKETINFRASTRUCTURE| KEYUNCERTAINTIES

Uncertaintiesaroundmarketinfrastructurelargelyconcernthefuturedirection
ofregulation,andtheimpactofnewtechnologiesontheindustry

1 WHATWEKNOW Thefourmarketinfrastructurefindingsillustratetheincreasingroleofplatformsincapitalmarkets.TraditionalOTC
productsarebecomingmoreandmoreelectronified,butarehinderedintheireffortstoscaleupduetofragmented
regulatoryandtechnologicalenvironments.Inordertoscaleupandgarnersuccess,jointventuresandpartnerships
betweenfintechsandincumbentsarekey.

Throughthesefindings,thefollowingkeyuncertaintiesaroundthefutureofmarketinfrastructureemerged:

2 UNCERTAINTIES

Whatwillpolitical Howwillbuyside Howfarawayare Whatwilldrivethe Howwilldisruptive

disruptionand investordemandfor disruptive necessary technologiesaffect
potential innovationandnew technologies,such cooperationto thevaluechainand
deregulationmean businessmodels asAIandDLT,from embednew individualrolesin
forplatformtrading shapetheplatform applicabilityand businessmodelsinto marketinfrastructure?
andproliferation? universe? scalabilityina theexisting
production ecosystem?
environment?
3 POSSIBLEFUTURES

Theresolutionofthesefivekeyuncertaintiespaintsthreedivergingpicturesofthefutureofthemarket
infrastructureindustry:

PlatformProliferation DataInfrastructureCollision NewPostTradeValueChains

Introduction Findings Uncertainties EndStates Conclusion 179

MARKETINFRASTRUCTURE| POTENTIALENDSTATES

Dependingonhowthekeyuncertaintiesareresolved,thepotentialendstates
haveverydifferentevolutionarypathsandimplicationsforallfirms

DATAINFRASTRUCTURE NEWPOSTTRADE
PLATFORMSUCCESS COLLISION VALUECHAINS

Thefirstendstatepaintsaworld Thesecondendstatepaintsa Thethirdendstatepaintsaworld

where: worldwhere: where:
Marketplatformsenhance Datafocusedfirmsexpand Infrastructureprovidersdisrupt
theirtoolsandstandardize withintheplatformarea thecapitalmarketsvaluechain
languages
Infrastructureproviders Improvements(e.g.realtime
Tradinginmanyassetclasses leverageinformationcustody settlement)leadtonew
becomeseasier toprovidedataservices marketstructures
Marketparticipantsadopt Asaresult,thoseplayersfind Someentitiesleavethe
platformsenmasse themselvesonacollision ecosystemwhileothers
course redefinetheirrole
Platformscontinuetoinnovate
asusagerises,thus Usersincreasinglyhavefewer Additionalresourcesarefreed
consolidatingtheirmarket providersforbothdataand upbyimprovementsto
position infrastructure processes

Introduction Findings Uncertainties EndStates Conclusion 180

MARKETINFRASTRUCTURE| ENDSTATEONE

Newplatformcapabilities,includingpre andposttradeprocesses,will
acceleratetheiradoptionacrossassetclasses

1 makeconnectingbuyside
Marketplatformsenhance
theirtoolsandstandardize
languagestoprovidemore
intuitivetradingworkflows,
streamlinepre andpost
tradeprocesses,and
improveinteroperability
Atthesametime,
technologicaladvancements
firmseasierandimproves
matchingofproductsto
customers,makingsellside
firmslessrelevant
2 4
3 Themovetoplatform
adoptionaccelerates,
withsomesurprising
Asaresult,platforms
assetclasses
becomecheaperandmore
successfullymoving
convenienttotradeon,
ontoplatforms
heighteningtheir
attractivenessfor
participants

CRITICALCONDITIONS
Astableregulatoryenvironmentisfavourableformarketproviders
Buysideclientsadoptanduseplatformsonasignificantlylarger
scale
EARLYSIGNS
Buysidefirmsstarttopartnerdirectlywithplatformproviders
Increasinglymoreplatformscreatesignificantliquidityin
production,asvolumesoftransactionsexecutedviaplatforms
growfurtherandformoreassetclasses

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 181

MARKETINFRASTRUCTURE| ENDSTATEONE

Theriseofadditionalplatformstofacilitatetradingincreasespressureon
incumbentstocontinuetoimprove,benefitingthebuyside

ImplicationsforIncumbent Implicationsfor
InfrastructureProviders NewEntrants

Moreplatformusagemeansincumbents Higherplatformusagewoulddirect
mustfurtherdeveloptheirexisting traffictoinnovativenewentrants,
platformsolutionstoprotectmarketshare allowingthemtogainmarketshare
Alternatively,theycouldpartnerwith Moreplatformusagewouldalso
emergingplatformsoracquirethem contributetoplatforminteroperability
andmultilateralrelationships,
benefittingnewentrants

Platform
Success

Implicationsfor
ImplicationsforRegulators BuySideCustomers

Regulatorswouldincreasetheirvisibility Platformswouldallowcustomersto
intothemarketasplatformusage becomelessdependentonsellside
grows,allowingforgreatertracingof participantsinthelongerterm
activities

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 182

MARKETINFRASTRUCTURE| ENDSTATETWO

Asinfrastructureanddataprovidersencroachontheotherscore
businesses,customerswilllikelyhavetochoosebetweenthem

1 Meanwhile,asmarginsin
Traditionalprovidersof
dataplatforms(e.g.
Bloomberg)continuetheir
expansionintoexecution
andposttradeprocessing,
deployingplatformsfor
newassetclasses
Thecompetitioncreatesboth
3 incentivesandpressuresfor
theircorebusinesseserode, customerstoreducethe
traditionalmarket numberofpartners,astheir
infrastructureproviders Withdataplatforms dataproviderwouldlikely
deepentheirfocuson operatetheplatforms
andmarket
monetizingtheirdataflows infrastructure theyuse
providersonacollision
course,newpointsof
competitionwill
2 appearbetweenthem 4

CRITICALCONDITIONS EARLYSIGNS
Thetrendtowardselectronificationofassettradingcontinues,and Platforminfrastructureprovidersstartfocusingonhiring
evenincreasesinpace employeeswithadatabackground
Theplatformenvironmentremainshighlycompetitive,andpure Dataand/orplatformprovidersstartofferingcustomersincentives
accesstostandardproductsrepresentsacommoditizedservice tousetheircompanyfortradinganddata
Newtechnologiescanbeappliedinenhanceddatascience(e.g.AI)
andarecoupledwithrobustmonetizationstrategies

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 183

MARKETINFRASTRUCTURE| ENDSTATETWO

Customersmayhaveadditionalchoiceregardingpartnerships,leadingtolower
costs,andwilllikelyworkwithfewerpartners

ImplicationsforIncumbent Implicationsfor
InfrastructureProviders IncumbentDataProviders

Expansionmaymeanmorepartnerships Movingintotheinfrastructurefieldmay
withoracquisitionsofdataheavyfintechs meannewinfrastructureswithdataat
toacquirecompetencies theircore
Regulatoryquestionsmaymeanmore Additionalcompetitionmaymeanmore
partnershipstoensureeasierrisk partnershipswithoracquisitionsof
management platformfintechstogaincompetencies

DataInfrastructure
Collision

Implicationsfor
ImplicationsforRegulators BuySideCustomers

Additionaldatameansmore Additionalserviceprovidersmaymean
opportunitiestomonitorthemarket lowerpricesandadditionalbenefits,but
oneproviderforbothinfrastructureand
However,regulatorswillhavetobuild
data
connectionswithdataproviders,an
entirelynewsetofconstituents However,theriseofdatameanssome
levelofacceptanceisneededthattheir
dataisnolongersolelytheirstouse

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 184

MARKETINFRASTRUCTURE| ENDSTATETHREE

Asincumbentsinvestinmarketinfrastructureimprovements,thevalue
chainwillnaturallyshift,leadingtoconsolidationandrolechanges

Theseimprovements,such Additionally,
asrealtimesettlement, improvementstothe
1 allowinfrastructure 3 posttradestructurefrees
providerstodisrupt upadditionalresources
traditionalcapitalmarket forcapitalmarket
Incumbentmarket valuechainsbyoffering Asaresult,intermediaries
incumbents,asless
infrastructureleadersstart moreservices,andtaking focusingononlyone
capitalhastobeheldfor
toinvestinnew onlargerroles servicegetpushedout,and
riskmanagement
infrastructurethroughout posttradefacilities(such
posttradeprocesses(e.g. ascentralsecurities
shifttorealtime depositories)movefrom
settlement) 2 settlementtowards 4
oversightandtrusted
guarantor

CRITICALCONDITIONS
Significantinvestmentinnewtechnologybymarketinfrastructure
providersmovesmarketstowardsrealtimeandflexiblesettlement
Regulatorsacceptnewtechnologybasedbusinessmodelsoreven
ecosystems,embedthemintoexistingregulatoryframeworksand
definethenatureoftherelationshiptoexistingecosystems
Newecosystemsarecomplementaryonaninternationalscaleto
reflecttheglobalnatureofcapitalmarkets
EARLYSIGNS
Investmentshareinnewinfrastructuretechnologiesrises
constantlyoverthenextfiveyears
CooperativemodelsonDLTecosystemsembracegrowingnumbers
ofindustrystakeholders
Thefirstdistributedledgersystemislaunchedinproductionbya
bankoranexchangeorganizationandlinkedtoposttradeactivity

Introduction Findings Uncertainties EndStates 1 2 3 Conclusion 185

MARKETINFRASTRUCTURE| ENDSTATETHREE
Theseimprovementstothevaluechainwillleadtosignificantsavingsforbuy
sideinvestors,ascashflowmanagementandriskmanagementcostsdecline
ImplicationsforIncumbent
InfrastructureProviders
Newtechnologiesallowincumbent
providerstorevampexistingbusiness
models,playingabiggerroleinthevalue
chain
Theneedtooffermoreservices(asthey
playabiggerroleinthevaluechain)may
meanconsolidationtoacquireexpertise
Ongoingconsolidationislikelytoresultin
anincreasingnumberofutilitiesand
consortia,aimedatcostmutualizationfor
nondifferentiatingandcommoditized
activities(e.g.KYCorRiskCompliance)
ImplicationsforRegulators
Improvements,suchasrealtime
settlement,maymeanamoredifficult
roleforregulators,asthereislesstime
forreview
Introduction Findings Uncertainties
ImplicationsforFintechs
Thechangestoinfrastructuremeanthat
blockchainrelatedorotherrealtime
focusedfirmswillfindmanypartners
However,incumbentsabilitytoown
moreofthevaluechainmaymakeit
harderforfintechstogainmarketshare
NewPostTrade
ValueChains
Implicationsfor
BuySideCustomers
Improvementstoposttradesettlement
willallowforsimplecashflow
managementandstreamlined
operations,increasingprofitsinthelong
run
EndStates 1 2 3 Conclusion 186
MARKETINFRASTRUCTURE|CONCLUSION

Keytakeawaysforfinancialinstitutions

INSUFFICIENCYOFTECHNOLOGYALONE
1
Newtechnologicalsolutionsaloneareinsufficienttoenablethecreationofnewmarketinfrastructureor
todrivesignificantchangesinexistinginfrastructure;thiswillmakeminimumviableecosystemsof
cooperatingstakeholderscriticaltodevelopment.Leadingplayersfromboththepublicandprivatesphere
willseektoactivelyparticipateinandshapethedirectionofthesestakeholdergroups

NAVIGATINGREGULATORYUNCERTAINTY
2
Differingregulatorydirectionaroundtheworldwilllikelyleadtobothregionalizationanduncertaintyin
theshortandmediumterm.Financialinstitutionswillneedtodeveloptheflexibilitytorapidlyadaptto
bothlargescaleregulatorychangesandregionallydivergentregulatorytreatmentofemergingmarket
infrastructuretechnologies

NEWVALUECHAINPRESSURESANDOPPORTUNITIES
3
Regulationandtechnologicaladvancementsaredrivingefficiencies,whichwillputpressureonincumbents
toconsolidatetheirpositionsandthusshortenthevaluechain.Forwardlookingfirmswillseektoposition
themselvesinareasthatwillcontinuetoaddvalue,includingareascurrentlyoccupiedbyotherfirms

Introduction Findings Uncertainties EndStates Conclusion 187

MARKETINFRASTRUCTURE|REFERENCES

References

1. DeutscheBrsebuysintoSorosbackedbondtradingplatform.FinancialTimes.Retrievedfromhttps://www.ft.com/content/d32a786a635a11e78814
0ac7eb84e5f1?mhq5j=e2
2. BestFixedIncomeTradingPlatform.FinancialNews.Retrievedfromhttp://tt.efnevents.com/shortlist/bestfixedincometradingplatform/
3. Electronictradinginfixedincomemarkets.BankforInternationalSettlements(BIS).Retrievedfromhttp://www.bis.org/publ/mktc07.pdf
4. CFTC:ANewDirectionForward.USCommodityFuturesTradingCommission.RemarksofActingChairmanJ.ChristopherGiancarlobeforethe42ndAnnualInternational
FuturesIndustryConferenceinBocaRaton,Florida(USA).Retrievedfromhttp://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo20
5. EUregulatorsconsiderMifidelectronictradinglockout.Risk.net.Retrievedfrom https://www.risk.net/regulation/mifid/4778566/euregulatorsconsidermifid
electronictradinglockout
6. SECDisclosureTrendsRelatedtoBrexitandtheTrumpAdministration.SkaddenArpsSlateMeagher&FlomLLP,publishedonLexology.com.Retrievedfrom
http://www.lexology.com/library/detail.aspx?g=3573f703ddec483fa53d9cba0201634f
7. DTCCPartnersWithIBM,StartupsForBlockchainBasedCreditDefaultSwapsSolution.Forbes.Retrievedfrom
https://www.forbes.com/sites/laurashin/2017/01/09/dtccselectspartnersforblockchainsolutionforcreditdefaultswaps/#28c877395061
8. ThomsonReutersReleasesBlockOneIQintoBlockchainDeveloperCommunity.ThomsonReuters.Retrievedfromhttps://www.thomsonreuters.com/en/press
releases/2017/june/thomsonreutersreleasesblockoneiqintoblockchaindevelopercommunity.html
9. There'sanew'hotbutton'issueonWallStreet,andbattlelinesarebeingdrawn.BusinessInsider.Retrievedfromhttp://www.businessinsider.com/stockexchanges
marketdatacostbecomingbigissue201610
10. EuronextInvestsinAlgomiandExpandsJV".Algomi.Retrievedfromhttp://www.algomi.com/companynews/euronextinvestsinalgomiandexpandsjv1
11. AuctionBackupsandBoringRegulation.Bloomberg.Retrievedfromhttps://www.bloomberg.com/view/articles/20150723/auctionbackupsandboringregulation
12. InformationretrievedfromtheFIASwapExecutionFacility(SEF)Trackerhttps://fia.org/seftracker

Introduction Findings Uncertainties EndStates Conclusion 188

 Acknowledgements

WORLDECONOMICFORUM|2017 189
ACKNOWLEDGEMENTS |PROJECTTEAM

ProjectTeam

ProjectLeadership ProjectAuthors
TheDisruptiveInnovationinFinancialServicesprojectleadershipteam TheWorldEconomicForumexpressesitsgratitudetothefollowing
includesthefollowingindividuals: individualsontheprojectteam:

WorldEconomicForum LLC DeloitteCanada

R.JesseMcWaters,LeadAuthor,ProjectLead PeterPearce
GiancarloBruno,SeniorDirector,HeadofFinancialInstitutions WilsonZhang

ProfessionalServicesLeadershipfromDeloitte Specialthanksforcontributionsfrom:
RobGalaski,CoAuthor,ProjectAdviser DominikHermann,DeutscheBrse

Additionalthanks
Theprojectteamexpressesgratitudetothefollowingindividualsfortheircontributionsandsupport:

ShrijaBajpai AlexandraDurbak VladVictorOncescu

KerryButts AbelLee ChristineRobson
AlexanderCarbone JackLuan MaxSeltzer
JuliaDiSpirito AlonzoNeese ElaineSmith

Andto:
DeloitteDigitalUK(Facilities)
TheBarclaysAcceleratoratRiseNewYork
VisaOneMarketCenter
AIGGlobalInnovationCenter
PekingUniversity,HSBCSchoolofBusiness

190
ACKNOWLEDGEMENTS | SUBJECTMATTEREXPERTS

ContributingSubjectMatterExperts(1of4)

Theprojectteamwouldalsoliketoexpressitsgratitudetothefollowingsubjectmatterexpertswhocontributedtheirvaluableperspectivesthrough
interviewsandbyparticipatinginworkshopandroundtablediscussions(inalphabeticalorder):

MikaalAbdulla 8Securities PatCronin BMO

AmyAllen DeloitteConsultingLLP ChrisCruzado WesternUnion
SamAllen CompareAsiaGroup MichaelCyprys MorganStanley
BillyAlvarado Stripe GiovanniDapra MoneyFarm
SeanAmatoGauci RBC LeeDavidson Morningstar
AndyAmbrose Liveoak ChipDempsey OCC
GilesAndrews Zopa RodgerDesai Payfone
TimAttia Slice KenDewoskin DeloitteServicesLP
PeterBailey Dataminr DanDickinson EquitableBank
AndreBajorat Figo JamesDixson NASDAQ
RachelBale Mastercard AndrewDresner JPMChase
LucBeaudry FINTRAC KirkDudtschak RBC
PeterBerg Visa ScottDueweke IDPay
WilliamBlack Moody's JohnEgan AnthemisGroup
BrockBlake Lendio ScottEllison PayPal
TomBlomfield MonzoBank ChristianFaes Lendinvest
AnneBoden Starling JamesFaucette MorganStanley
FrancisBouchard HamiltonPlaceStrategies DanielFeichtinger DigitalAssetHoldings
MaryKayBowman Square BenjyFeinberg Behalf
EliBrill Mastercard PolErwanFritz ING
BartBrouwer ING DebbieGamble Interac
RyanCaldwell MX JenniferGeverMcKellar CME
ClaireCalmejane LloydsBankingGroup LiamGillligan CommonwealthBankofAustralia
NormCappell Borrowell BeatrizGimenezMonlleo BBVA
BillCecil StateFarm RasmusGoksor Bison
SeanChai AIG JaredGoldstein DeloitteConsultingLLP
LibbyChambers WesternUnion KellieGoodwin Visa
SonikaChandra WesternUnion DanielGorfine OnDeck
DonaldChapman ModoPayments AndrewGraham Borrowell
TimChen NerdWallet BetsyGraseck MorganStanley
RonChiong HongKongSecuritiesandFuturesCommission JoeGuastella DeloitteConsultingLLP
RajuChithambaram Intuit ManuGupta Lakestar
RichardColucci Algomi JulienHammerson Calastone

191
ACKNOWLEDGEMENTS | SUBJECTMATTEREXPERTS

ContributingSubjectMatterExperts(2of4)

Theprojectteamwouldalsoliketoexpressitsgratitudetothefollowingsubjectmatterexpertswhocontributedtheirvaluable perspectivesthrough
interviewsandbyparticipatinginworkshopandroundtablediscussions(inalphabeticalorder):

KevinHanley RoyalBankofScotland DanielKlier HSBC

NaureenHassan MorganStanley AlexKong TNGWallet
CatherineHavasi Luminoso LingKong Dianrong.com
JrgHessenmller Commerzbank NorrisKoppel Monese
TaavetHinrikus TransferWise DineshKrishnan Zafin
BiancaHo Clare.ai AmarKuchinad Electronifie
KentHo Spectrum28 ClaudeKurzo JPMorganChase
JonHocking MorganStanley MaryCatherineLader BlackRock
BrentHoman OPC CarolineLamaud Anaxago
SunsyHong BankofAmerica/MerrillLynch JoelLambert PayPal
ChuckHounsell TD ChrisLarsen Ripple
HuanHu MorganStanley LaurenceLatimer IEX
TomHutton XLInnovate WeiLinLee PayPal
JurgenIngels SmartFinCapital JiangLei ChinaScienceAcadamyIncubator
AndrewIreland HSBC WinnieLeung Moneris
SriramIyer ICICIBankCanada ZhongLi Shulaibao
CedricJeannot APrivacy MarcLipman AIGCanada
CaiJian PekingUniversity CaitlinLong Symbiont
ZhouJing DuMiao JorgeLpezAranda WellsFargo
GarriJones Numis JeffLynn Seedrs
BjornJungerkes Savedo ColmLyon Fire
AnkurKamalia DeutscheBrseAG JohnMacKinlay OMERSVentures
RichardKang PayNearMe KevinMak IronflyTechnologies
AdamKansler IHSMarkit MehdiManaa ECB
BobKelly BankofAmerica ChrisManners MorganStanley
ElizabethKelly UnitedIncome EmmanuelMarot LendingRobot
KarenKerrigan Seedrs JohnMartini Generali
AndrewKeys Consensys HeatherMasterson TravelersCanada
ShirineKhouryHaq Lloyds RichardMatthews AugmentumCapital
HwanKim DeloitteCanada ToddMcDonald R3
DanielKimerling SiliconValleyBank KirillMenshov Otkritie
DougKing DeloitteMCSLimited JeffMerkel Ladder
CharakaKithulegoda ATB DouglasMerrill ZestFinance

192
ACKNOWLEDGEMENTS | SUBJECTMATTEREXPERTS

ContributingSubjectMatterExperts(3of4)

Theprojectteamwouldalsoliketoexpressitsgratitudetothefollowingsubjectmatterexpertswhocontributedtheirvaluable perspectivesthrough
interviewsandbyparticipatinginworkshopandroundtablediscussions(inalphabeticalorder):

MaxMesny MorganStanley JeanLucSavignac Eurex

RobMoffat BaldertonCapital AndreasSchertzinger SwissRe
BrodyMulderig WellsFargo MikeSha SigFig
ZaydoonMunir RevolutionCredit BethShah DigitalAssetHoldings
HuyNguyenTrieu TheDisruptiveGroup MichaelSidgmore BroadhavenCapitalPartners
RaminNiroumand FinLeap SiddharthSingh BankofAmerica
BenedicteNolens HongKongSecuritiesandFuturesCommission ShivaniSiroya Tala
SharonOlexy LendUp TravisSkelly CitiVentures
IlianaOrisValiente ColliderX ChrisSkinner TheFinanser
SashaOrloff LendUp GordonSmith DeloitteConsulting LLP
HenrikOtterson Invesdor JaredSmith HSBC
RobertPalatnick DTCC MikeSobel Trumid
KaiPan MorganStanley BenoitSpeybrouck Belfius
JenniferPeve DTCC MichaelSpitz Commerzbank
BenjaminPhillips CaseyQuirk,DeloitteConsultingLLP KarlSponholz Spotcap
JanPilbauer PaymentsCanada JohnStackhouse RBC
MartaPlana DigitalOrigin RobertStark JPMorganChase
DavidPolonsky FundApps PhilippeStephan Viewpost
DanPreston Metromile RobStrickland Fidelity
DanQuan CFPB SamTaussig Kabbage
ShameezRabdi OntarioMinistryofFinance MassimoTessitore IntesaSanpaolo
JPRangaswami DeutscheBank ClarkThompson R3
GlennRegan UBS SamTidswellNorrish MotivePartners
PeterRenton LendItConferenceLLC EdwardTwiddy Atom
PaulRiley BankofAmerica/MerrillEdge LuisValdich CitiVentures
CatherineRoche BMO GregvandenBergh MiCai
LynnRoger BMO KatleenvanGheel ING
DavidRosa Neat GeertvanMol BelfiusBank
ShawnRose Scotiabank HuwvanSteenis Shroders
FayeSahai AIG PaulVienick MorganStanley
KetanSamani UBS Philippvonder
KateSampson Lyft Schulenburg MunichRe
ScottSanborn LendingClub ScottWalchek Troy

193
ACKNOWLEDGEMENTS | SUBJECTMATTEREXPERTS

ContributingSubjectMatterExperts(4of4)

Theprojectteamwouldalsoliketoexpressitsgratitudetothefollowingsubjectmatterexpertswhocontributedtheirvaluable perspectivesthrough
interviewsandbyparticipatinginworkshopandroundtablediscussions(inalphabeticalorder):

PaulWan StandardChartered
Harry WangWei LinearVentures
AndrewWhite FundApps
DarrylWhite BMO
IvarWiersma ING
GrantWilson etradingSoftware
JamesWise BaldertonCapital
RayYang MarathonVentures
BradYankiver MotivePartners
JasonYoung PayPalCanada
AlexYpsilanti Quantifeed
NinaZhou CreditEase
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