Cayman Islands: Beyond Fintech

The financial services' ecosystem is changing rapidly.

A collaborative multi-year study by the World Economic Forum and Deloitte looks at how these changes are manifesting, and the implications for Incumbents, FinTechs, and Regulators.

In just a few short years, FinTech companies have defined the direction, shape, and pace of change across almost every financial services subsector. Customers now expect seamless digital onboarding, rapid loan approvals, and free person-to-person payments — all innovations that FinTechs made popular. Although not yet dominant in the industry, FinTechs have succeeded as both standalone businesses and vital links in the financial services value chain. They have laid the foundation for future disruption.

FinTechs represent a great opportunity for smart incumbents. They provide a chance to see which new offerings show promise. The FinTech ecosystem is also a veritable supermarket of capabilities, allowing incumbents to rapidly deploy new offerings via acquisitions and partnerships.

However, accelerating change could be a serious threat. It means that an incumbent's success is predicated on business model agility and the ability to rapidly deploy partnerships. Neither of these is a mainstay of established financial institutions. What's more, upstart firms can shop the FinTech landscape too - and they face significantly lower barriers to entry.

Since 2014, Deloitte has partnered with the World Economic Forum (the Forum) to study disruptive innovation in financial services (the Study). Bob Contri, Deloitte's Global Leader of Financial Services, sat on the Steering Committee and Rob Galaski, Deloitte leader for The Forum Future of FSI, formed a part of the working group. The most recent publication of the Study in August 2017 distilled eight insightful disruptive forces that have the potential to shift the landscape of financial services.

Recognised as the world's premier financial hub, the Cayman Islands has a unique blend of international institutional and local retail services. As such, these forces affect the jurisdiction as a whole and its many independent financial service providers uniquely and likely on slightly different timeframes than the rest of the world. These forces and their implications are touched on briefly here.

DISRUPTIVE FORCE #1: COST COMMODITISATION

Facing enormous pressure to reduce their cost base, incumbent financial institutions are embracing new technologies, as well as working with long-time competitors and new entrants alike, to commodify cost drivers that do not provide competitive differentiation. One approach is to create a new utility that standardises processes and avoids duplication of work among the companies it serves. Other approaches include expanding the range of outsourced activities and increasing automation to streamline processes such as loan origination, audit compliance, and account reconciliation.

In digital banking, banks are increasingly working in concert with regulators to set up trials of utilities focusing on mission-critical but non-core tasks such as KYC (Know Your Customer) and AML (Anti-Money Laundering).

For example, the Monetary Authority of Singapore is working with several banks to build a national KYC utility, which will reduce duplication and lower costs for all financial institutions operating in the jurisdiction. At the time of writing, Cayman clearing banks are collaborating to establish an electronic automated clearinghouse that will reduce local transaction times and related costs.

As a result of Cost Commoditisation, the financial services value chain will flatten and firms will step up their protection of user data as they share more information with external organisations. Incumbent firms will be freed (or forced) to focus on differentiating their customer-facing processes as their middle and back offices become indistinguishable from those of competitors. Regulators will stay busy tracking utilities and business service providers for potential risk.

DISRUPTIVE FORCE #2: PROFIT REDISTRIBUTION

Technology is shaking up the financial services value chain. Investment firms are using exchange-traded funds (ETFs) to entice customers away from savings deposits. Online sellers are accepting payments via web applications, leading to the dominance of online, cashless solutions for transactions and precluding the need for a traditional merchant bank account. Incumbent institutions are pairing with startups in ways that put them in competition with their traditional partners. The result of all this activity? An industry-wide redistribution of profits.

Intermediaries will feel the pinch from both sides. As technology reduces the cost of bypassing them to reach the end customer, intermediaries will need to find other opportunities to profitably add value.

Meanwhile, FinTech companies will gain an expanding pool of potential partners that offer scale and customer reach. Up-and-coming technologies will encourage both incumbents and FinTechs to bypass traditional value chains, creating vigorous competition for both adjacent and new areas of profit.

Insurers and reinsurers increasingly partner with outside organisations (such as insurtech and large technology firms) to acquire expertise and hedge against disruption. At least one large reinsurer is partnering with product start-ups – including Bought By Many and Trōv – to directly compete with its traditional insurance partners.

The challenge for regulators will be to understand how shifting fortunes are reshaping the value chain, with long-regulated companies giving ground to new ones.

DISRUPTIVE FORCE #3: EXPERIENCE OWNERSHIP

The rise of distribution platforms allows product distributors to leverage control of their customer experience and place pressure on manufacturers. This means incumbents can no longer rely on controlling both product manufacturing and distribution. Power will transfer to the owner of the customer experience. Pure manufacturers must therefore become hyper-scaled, or hyper-focused.

Current examples offer an early glimpse of this post-integrated world. Customers buy ETFs from a wide range of companies that offer robo-advisory services. They download apps from providers that stringently control which products to display. If trends like these take hold, customers will interact with increasingly fewer distributors as the market consolidates. Large technology firms and incumbent financial institutions have the advantage, the former due to their rich customer data and the latter because of their brand and existing customer base.

DISRUPTIVE FORCE #4: PLATFORMS RISING

In close tandem with the force of Experience Ownership, customers are demanding more choices in financial services—and, increasingly, they expect one-stop shopping. True to capitalist principles, this provides opportunities, and the shift to multiple-provider platforms as a channel to distribute and trade is gradually emerging across geographies and throughout a wide range of financial products.

The Study predicts that platforms offering the ability to engage with different financial institutions from a single channel will become the dominant model for the delivery of financial services. Business and retail customers, for example, will be able to purchase credit and asset management services from an online storefront of competing vendors. Buyers and sellers in the capital markets will be matched through platforms that accommodate a wide range of trades.

This trends toward fewer, bigger winners in the long term. Platforms will offer customers far more choice around what they are buying, significantly increasing the advantage for the best products, which might otherwise have limited reach. We expect first movers to take the early advantage, and are watching with interest to see how adoption plays out on the Cayman economy among banks, insurers, fund administrators and other financial service players.

DISRUPTIVE FORCE #5: DATA MONETISATION

Financial institutions know a lot about their customers. However, when it comes to monetising this knowledge — or, more precisely, the data beneath it — technology companies have the lead. The reason? They've moved beyond static datasets to combine rich, differentiated data from multiple sources - and they use it in real time.

The potential of this approach is not lost on the financial services industry. Facing a future where data is increasingly important, firms are starting to collect it in flows rather than in snapshots - for instance Visa Mobile Location Confirmation, which is optional and offered through participating financial institutions' mobile banking apps, uses real-time mobile geo-location information as an addition to Visa's predictive fraud analytics.

Firms are also looking to expand their customer datasets using a more engaging digital experience as a platform, or teaming up with other companies, offering customers additional value as a market differentiator in exchange for their data.

Naturally, ownership and control of data are a key issue for all stakeholders. Data security will be crucial to establishing and maintaining customer trust. New partnerships will be evaluated for the data they can provide. Incumbent institutions will have to decide whether it is worth keeping data in legacy systems as opposed to new systems where it can be easier and possibly safer to maintain. As for regulators, the concerns will include not only hacking, but also the ways banks use the additional data and how well customers understand the implications of sharing it.

DISRUPTIVE FORCE #6: BIONIC WORKFORCE

Artificial intelligence (AI) isn't coming. It's already here, and it's not simply a smart chatbot. People are working alongside AI to boost their efforts, greatly reducing the time and personnel required to complete major projects that involve well-defined, repetitive tasks. Don't read that to mean simple tasks only. Machine intelligence firm Ayasdi worked with a major bank to improve its stress testing, from a nine-month process requiring hundreds of employees to a three-month process using less than 100 specialists. AI is a scalable product that is becoming commercially viable for smaller institutions as it matures. Going forward, AI risk management will become an industry-wide priority. For regulators, AI will require new strategies, including ones for enforcement and punishment of non-compliant actions. The intersection of AI and human resources has been the subject of much discussion, but so far, the debate has raised more questions than answers. One clear take away: AI will remove friction from front and back office processes, sending people into roles that emphasise innovation, engagement, and emotional intelligence.

DISRUPTIVE FORCE #7: SYSTEMICALLY IMPORTANT TECHS

Financial institutions increasingly resemble, and are dependent on, large tech firms to acquire critical infrastructure and differentiating technologies. For example, Amazon Web Services (AWS) is forming the backbone of the financial services ecosystem, with a diverse set of firms – from JP Morgan to start-ups such as Xignite – adopting AWS for data storage and processing.

Financial institutions have also used the example of large techs successfully unlocking data and revenues from customer platforms to guide and shape their own efforts. JP Morgan is investing in the collection and analysis of its customers' data with a new customer management and analytics tool, enabling cross-selling – "a little bit like how Amazon suggests what you might like to buy next."

So far, major technology companies have shown little interest in offering financial services. However, the implication is that financial services faces a balancing act: On one hand, they risk becoming dependent on large techs, but on the other, they risk falling behind their competitors. To avoid either outcome, financial institutions will need to find ways to partner with technology companies and potentially each other without losing their core value proposition, and accept some loss of control over their costs and data. They'll also have to compete with large techs for talent, forcing them to redefine their talent model. Regulators will have to figure out how to treat large techs under a traditional regulatory framework.

DISRUPTIVE FORCE #8: FINANCIAL REGIONALISATION

Differing regulatory priorities, technological capabilities and customer conditions are challenging the narrative of increasing financial globalisation.

In Europe, for instance, regulations to bolster data transparency and consumer protection is driving the development of platform ecosystems and putting pressure on incumbents. In China, the popularity of mobile solutions – combined with an absence of major consumer-focused bank offerings and a largely innovation-friendly regulator – has left significant market share in the hands of large technology companies.

In the United States, unclear regulatory direction plus a mature financial services industry means that any change is likely to be incremental. The US Automated Clearing House Network, for example, is moving to same-day payments, but progress remains slow compared to other countries (such as the United Kingdom, which adopted real-time payments over a decade ago).

Under these conditions, regional FinTech hubs could crop up, creating breeding grounds for companies with geographic-specific offerings. For incumbent firms, even global ones, financial regionalisation will mean cultivating locally competitive advantages and integrating with local economies. FinTech companies may prove eager partners as they seek opportunities to scale and enter new markets. For their part, FinTechs will be challenged to establish themselves in multiple jurisdictions, despite the potential of technology to lower barriers to entry.

In a climate of regulatory uncertainty, financial institutions will have to develop an ability to swiftly adapt to large-scale regulatory changes as well as to regionally disparate regulatory treatment of emerging market infrastructure technologies.

As large incumbents push for global convergence and their smaller rivals campaign for localised regulations, regulators will have to find the right balance for their jurisdictions.

In conclusion, disruption has become the norm in a traditionally stable industry. For incumbents to face the mire of competition and rapid change, some helpful themes have emerged:

Proactively seek change. This includes finding ways to innovate and create different value, especially as intermediaries lose their customary place in the value chain. A sense of urgency must be present at the top of the organisation.

Prepare to be agile. Regulatory jurisdictions are moving apart, and technology is upending processes in both front and back offices. In some cases, the only way forward may be with a partner, requiring firms to develop skills in managing peer-to-peer business relationships.

Choose a strategy and pursue it aggressively. Institutions may not be able to own both product manufacturing and product distribution. Rich datasets will be required to stand out either way – and there will be fewer, bigger wins.

Footnote

This article is adapted from the World Economic Forum report, Beyond FinTech: A pragmatic assessment of disruptive potential in financial services and the Deloitte publication, Beyond FinTech: Eight forces that are shifting the competitive landscape, available for download at www.deloitte.com.

ABOUT THE AUTHOR

Tristan Relly is a Director in the Financial Advisory team at Deloitte with over seventeen years' experience in business analytics, business modelling, strategy, liquidations, and financial and forensic audits. Tristan has provided a leadership role on a number of significant projects across the financial services industry for both mid-size and large financial institutions domiciled in the Cayman Islands and internationally. Tristan is regarded as an innovative and versatile leader in the Deloitte team. Deloitte in the Cayman Island boasts a Technology Consulting squad of over 18 specialists.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions