GC: In the legal sector, many people describe the emergence of legal tech start-ups as ‘fintech’s little brother’. Could you tell me about the emergence of fintech, Giulio, and how it has impacted the banking sector?
Giulio Romanelli (GR): Banking has historically been one of the business sectors most resilient to disruption by technology. However, in the last ten years, fintechs have moved quickly, forcing incumbents to rethink their core business models and embrace digital innovations. In the last five years, we’ve seen a significant journey as fintechs have become more and more mature.
Today, banks remain uniquely and systemically important to the economy; they are the major repository for deposits, which customers largely identify with their primary financial relationship; they continue to be the gateways to the world’s largest payment systems; and they still attract the bulk of requests for credit.
Some things have changed, however. Firstly, the financial crisis had a negative impact on trust in the banking system. Secondly, customers are more open to relationships that focus on origination and sales. Thirdly, mobile devices have undercut the advantages of physical distribution. Plus there has been a massive increase in the availability of data alongside a significant decrease in the cost of computing power.
GC: To what extent would you term it a disruption?
GR: We can call this a disruption in the sense that fintechs have a unique opportunity for customer disintermediation, by leveraging advantaged modes of customer acquisition, a step-function reduction in the cost to serve, innovative use of data and advanced analytics, and segment/niche-specific propositions.
GC: When insurtechs started popping up in the insurance space, what was the reaction like in the industry, John?
John Pyall (JP): At the beginning, to a certain degree, insurtechs were looked upon with interest, but as: ‘It’s a bit gimmicky, it’s interesting but it’s not for us.’ And then, over time, they were looked at with more and more interest. From our point of view, we made a clear play in that direction. But I think there still is a little bit of ‘watch and see’ about the insurance market as a whole.
GC: Have insurtechs disrupted the insurance space?
JP: I think people look at disruption as being a negative idea. I think insurtech start-ups have, to a certain degree, enhanced the insurance area because they have actually allowed insurers to touch into areas that we previously may not have been able to. For example, digital partners have allowed us to reach out to new customers that we may not previously have ever gotten close to, simply because of the mediums they use to connect to their services. We have insurtechs that purely use social media to market to their customers and their clients and, to a certain degree, their distribution models are so different from what we were traditionally used to it has meant we have got avenues to customers we would never have considered five years ago.
That may be younger people, it may be people who are more engaged in social media. It may be people who are looking to insure single item contents, which insurers wouldn’t have looked at before. We would have had difficulty insuring people employed in the gig economy, doing three jobs in a day, but these new models enhance our ability to do so.
GC: Has this involved an element of culture change?
JP: When you have companies coming in that are younger, more flexible and they are able to drive through changes very quickly within their own organisations, you look at that and say: ‘We need to show that we have that ability as well. If we want to be in this market we have to be able to deal with that.’ So therefore it does actually allow people to think positively about how can we adapt, to differentiate ourselves within these markets.
GC: Looking again to the banking sector, how have established banking organisations responded to fintech disruption? Has it has a knock-on transformative effect in terms of the way these organisations use technology?
GR: As successful fintechs have rapidly matured from start-ups to mature technology disruptors, banks have started the long journey to transform their core digital capabilities, with several areas of focus. These include: a digital-native customer experience; big data and advanced analytics; moving towards a scalable technology landscape through cloud and automation; adoption of APIs (Application Programmable Interface).
Firstly, banks have been creating an integrated customer experience inspired by digital attackers, versus using a one-size-fits-all distribution. So rather than using the branch as the main point of interaction with customers, all the banks have mobile apps and they are very proud of the features that they use to differentiate themselves.
Innovating the customer experience by integrating with fintechs can provide advantages. For example, take the typical onboarding time for corporate lending. A fintech such as Kabbage proposes to reduce the onboarding time for down from something close to days, to something which is close to minutes.
Secondly, using data-driven insights and analytics holistically across the banks. While focus is generally on ‘customer-facing’ use cases, it’s very interesting to see advanced analytics applied internally to drive operational efficiency. For instance, advanced analytics to improve quality and efficiency of KYC [Know Your Customer] and anti-money-laundering.
Thirdly, banks have been mitigating the potential cost advantage of attacks through radical simplification and refining of technology infrastructure, both on process and existing technologies. For example, leveraging and deploying new technologies such as Cloud enables banks to move towards a more scalable and cheaper technology footprint.
Finally, there are several cases in which banks want to be able to offer not only their own solutions, but to also be able to link to third-party solutions. Some financial players want to offer third-party APIs directly to their own customers. And this is happening right now in terms of payments.
GC: How has technology transformation been received in the banking sector – has it required a lot of culture change?
GR: All of the above have required a significant shift in terms of culture and capabilities of incumbents, which are nowadays focusing more and more to attract digital/tech talent.
Moreover, the pace of innovation in banking is accelerating rapidly, requiring banks to increase their speed to keep up, adopting Agile software development techniques, which imply a radically different way to think about the organisation.
GC: John, in the insurance space, can you tell me a little bit about your role in Munich Re, and how the company is working with insurtechs?
JP: I head the MGA Cockpit, which assists our digital partner unit in onboarding new digital partner business into the Munich Re. A digital partner is a partner – an insurtech start-up normally – which is interested in using digital means like an app, social media, or the internet, in order to secure insurance business. The Cockpit was created 18 months ago through the Munich Re think tank to help the due diligence process of the start-up.
We have a digital partner unit that finds new ideas and new business to be brought in as a product, and we assist them in making that a viable insurance product. Basically somebody comes to our digital partners unit with an idea, and we help them develop that into a formalised product and assist them to bring that into operation.
GC: How do you do that?
JP: We may look at whether they want to write that as a single risk, as a group policy, do they need to write it with an MGA? We look at what’s needed in the wording in order to make it effective. We then see what they need to do: how they are going to handle the claims, do they need to outsource that, we might provide them with someone to manage the claims on their behalf.
GC: Are incumbent insurance organisations under threat from insurtechs or is it going to be a process of greater partnering, do you think?
JP: There’s always going to be one or two insurtechs that may seem to be a potential threat. But I would say that generally the growth will be by partnering – that’s where people are really looking. There are very few that are coming in to disrupt the entire chain; I think most are looking to assist within the distribution chain itself. That helps both the existing business and the new start-up, so there are advantages to both sides if you get it right.
GC: How are banks working with fintech companies? To what extent are partnerships occurring? What are the benefits of partnering? And what are the challenges?
GR: Whereas market and media commentary has emphasised the threat to established business models, the opportunities for incumbents to develop new partnerships aimed at better cost control, capital allocation and customer acquisition are growing.
The vast majority of fintechs focus on retail banking, lending and payments. In many of these areas, start-ups have sought to target the end customer directly, bypassing traditional banks. In some cases, this is further accelerated by regulatory changes such as PSD2 [the second Payment Services Directive, a 2015 EU Directive] in Europe, accelerating the shift towards open banking ecosystems.
However, most recent analyses suggest that the structure of the fintech industry is changing and that a new spirit of cooperation between fintechs and incumbents is developing. For example, ING partnered with the lending start-up Kabbage back in 2015 to deliver instant capital to SMEs. Another example is the fact that blockchain development in recent years has been mainly pushed by consortia, bringing together banks and fintechs.
This offers significant benefit for both parties, as it allows fintechs to rapidly access and offer their services to large pools of customers, while incumbents can rapidly deploy customer-centric digital-native services, and strengthen their own digital capabilities and talent pool. Looking ahead is whether such a ‘coopetition’ model is really sustainable in the long term – ie whether one side of this equation becomes more relevant.
GC: From an insurance incumbent point of view, John, what might be the blockers to partnering with insurtechs?
JP: I think culture does have something to do with it – can you build new technology into your existing systems?
Regulation is also one. We are a very regulated industry, so we have to be careful about how we take steps. It cannot be revolution, it has to be evolution. New technology makes people nervous – they understand their business and they understand how it works. If you then drop outside of that, can you write the business in a different model? How does that work?
Another thought is whether you are actually going to end up competing against yourself. That is a clear worry that people have – am I actually just offering the same thing but getting less value out of it?
GC: In your opinion, Giulio, what are the most exciting technological developments in the banking sector?
GR: Looking forward, the most exciting technology developments are related to the next evolution of current tech must-haves, from advanced analytics and machine learning, to intelligent automation, to blockchain, to internet of things.
GC: And how about the insurance sector?
JP: In terms of new tools, there are home and emergency products, for example alarm systems which allow you to instantly know if you’ve got water leakage or a fire or something like that when you’re away from your home.
A lot of it is around trying to change how product service is given, so we’ve got flight cancellation tools looking at how you can get on a new flight.
There are ways insurers are using data to be more proactive and customer-centric in managing loss better, so if there’s a flood, we can identify which potential customers are affected instead of waiting for them to contact us.
I think the way customers approach insurers is going to change quite dramatically as well. They can manage their whole claim themselves, so they know where the claim is at any stage.
GC: In terms of the technology that’s underpinning these new insurance facilities, what are the trends there?
JP: The technology itself is very AI-dominated. It is very much about how much can we automate so that we can respond quicker to customer needs, and keep them informed.
The balance is between automation and empathy – you don’t want a chat bot to respond to a customer in a very automated way when you’re dealing with something which has an emotional requirement.
GC: Do you get a lot of pushback from customers on that?
JP: If you have bought through a digital platform, to a certain degree you assume you are going to go through a digital journey and there’s a certain acceptance to that. However, there are times where people want to drop out of that digital journey, and you have to be prepared to respond to those touch points.
The key is to be flexible, to look at where it can actually genuinely assist, but to make sure you put your customer first. Whereas AI can actually help you reduce cost and make that customer journey more effective, what you don’t want to do is lose that empathetic relationship with the client so they become a customer that touches base with you once and looks purely at price.
