Cayman Islands: Paradigm Shift Disruption & The Fintech Effect

Disruption, innovation and change are rapidly impacting the financial services industry across the globe, and the Cayman Islands will need to adapt to ensure the industry is poised for success in response to this paradigm shift. Not only will we face dramatic change but financial service providers in Cayman can also expect to embrace exciting new opportunities.

INNOVATION

There is no question that technology will break tradition as digital technologies outperform in effectiveness and cost. This change will be more than just a temporary one. We see FinTech as one of the most disruptive opportunities — or threats.

According to the EY FinTech Adoption Index, FinTech has achieved initial mass adoption in most markets. The average percentage of digitally active consumers using FinTech services has now reached 33% across the 20 markets. Benchmarked to academic theory on innovation adoption, it suggests that FinTech services have reached a milestone in being adopted by the "early majority" of the population. Unsurprisingly, use of FinTech products and services is higher among younger consumers. Those with the highest use are 25 to 34 year old consumers who are tech-savvy "digital natives." As these consumers amass more wealth through inheritance or personal wealth generation, the need for FinTech services will be even more prevalent.

Technology will redefine the future of investment advice and investing. With robo-advisors, blockchain, advanced analytics and artificial intelligence acting as key accelerators in the industry, there are multiple opportunities to innovate ahead of the competition. FinTech investment is expected to accelerate rapidly and focus primarily on client interface, increased automation both in the front and back office and greater transparency.

In addition, robo-advisor platforms are enhancing, supplementing and, in some cases, replacing advisor-client interaction. This has resulted in more value, services and efficiency to customers through a digital cost-effective channel.

The trend toward automated delivery of advice is changing expectations for the entire investor group — not just the mass affluent. The entire wealth and asset management (WAM) industry must change and meet new expectations to survive.

The investing landscape is also changing significantly with investment strategies, which relied upon high human capital, being disrupted by quantitative strategies wagering on algorithmic performance derived from sweeping advancements in the analytics and use of big data.

Blockchain is another emerging driver impacting the industry. Asset servicers will be forced to evolve their business models and fully integrate distributed ledger technology, rather than be disrupted by it.

Moreover, just as your smartphone has absorbed other products like camera, GPS, video, maps, etc, this same "dematerialisation" using blockchain and distributed ledger technology in our industry will present opportunities to radically transform, consolidate, modernise and streamline the way asset management firms handle payments, custody, clearing and settlements for most financial transactions.

Furthermore, the traditional value chain will be disrupted with access to digital distribution. Digital distribution platforms not only streamline investor reporting but also connect advisors directly with investors. Robotics are also being widely adopted and implemented, especially in operations. The result has been to increase productivity and scale, streamline and automate processes, replace manual actions, and manage costs and better allocate human capital to higher-value tasks enterprise-wide. Examples of this include automation in AR, AP, reconciliation processes, processing of capital transactions and compliance and reporting.

In Cayman, we expect there will be a rebalancing of client assets to existing banks and asset managers as well as new entrants that are able to deliver services more cost effectively while enhancing the customer experience through digital and personal channels. Consumers will demand more, so the expectation bar will be raised significantly.

Financial services institutions that want to stay in the game will need to make the right investments in technology not only to stay ahead of client demands but also to defend existing client business and seek out new clients who will look for an institution with the latest technology solutions.

DATA AS AN ASSET: GENERATING GROWTH NOT JUST STRATEGIC EFFICIENCY

There has been a lot of focus on data analytics. The future financial institution or asset servicer that will be successful will be the one that can aggregate, analyse and interpret large volumes of data from multiple services for better predictions and insights related to their investment strategy. Global firms will find that data is their greatest opportunity and their greatest challenge. Firms must no longer confine technology to the back office for cost-saving purposes.

By aggressively leveraging technology in the front office as well, winning firms can grow distribution through big data techniques using client analytics. Asset servicers that can aggregate, normalise, transform and deliver data to and from financial institutions, including custodians, investment managers, managed accounts, third-party administrators and banks will be poised for success.

Skillfully and innovatively leveraging data will undoubtedly drive growth for financial institutions in the long term.

DIGITAL INTERACTION AND THE CLIENT EXPERIENCE

Social media has changed how we interact and the number of people we interact with. The generation of high-net-worth individuals who are growing up using social media platforms such as LinkedIn, Facebook and Twitter will select which bank to deposit their savings with or which investment strategy and advisor they will trust based on their digital interaction.

This increases potential investor discovery rates; however, the new investor is accustomed to sharing information and is tech savvy. It is essential for wealth and asset management firms to shift from a focus on simply promoting products to building and leveraging a core business model based primarily on knowing their investor/customer and enhancing their experience. For firms to win new business, their investors and clients must feel that a trusted lifetime financial coach is advising them to reach their long-term personal goals.

The most innovative firms in wealth and asset management, although operating in an intensely competitive sector, can find ways to add value by improving the personalised client experience. Value will depend heavily on the customer experience, as well as the firm's ability to seamlessly fit into a customer's digitised, connected life and address his or her personal core values and preferences. The trend of portfolio transparency and accessibility is likely to continue, and having the right systems in place to meet that need is essential. Value creation begins well before an account is even opened as the result of developing a fresh brand identity in the market, enhancing the firm's reputation and clearly communicating a compelling purpose.

CYBERSECURITY: SENSING, RESISTING, REACTING

With this paradigm shift and adoption of FinTech, cyber risk is increasing dramatically. Given the abundance of client and investor data, it is crucial to protect data and provide the confidentiality that investors or clients expect and demand.

This has become more important with the increase in web-accessible digital client interfaces and the proliferation of managed service solutions, online platforms for product distribution, transaction and data storage.

As reported in the EY Global Information Security Survey, we expect institutions to adopt three steps to achieve cyber resilience: (1) Sense: using cyber threat intelligence and active monitoring to predict threats and detect when they happen, (2) Resist: understanding how much risk is acceptable and establish lines of defense and (3) React: ensure there are incident response capabilities in place to manage the crisis.

Our survey reveals that 86% of respondents stated that their cybersecurity function does not fully meet their organisation's needs, and 57% have had a recent significant cybersecurity incident, showing there is still more work to do to strengthen the corporate shield.

The greatest asset any firm has is trust, so it is critically important for institutions to do everything in their power to uphold and maintain this trust. However, this is no easy task as there are three types of institutions: those that have been hacked, those that don't know they have been hacked and the criminal hackers themselves. Companies struggle with admitting vulnerability to themselves.

Understanding that it will happen and having a policy in place to respond quickly and appropriately are key and will go a long way toward restoring trust and order once a breach occurs.

It is increasingly vital to safeguard the trust of clients and regulators by investing aggressively and strategically in cybersecurity to prepare for cyber attacks. High-profile instances involving cybercrime have shaken several financial institutions.

Many institutions are engaging specialists to address data security by reviewing with whom they are sharing sensitive data and subjecting these data users to due diligence and monitoring or simulated pen tests executed by an external IT specialist who plays the part of a highly skilled and determined hacker.

CONCLUSION

Innovation is rife throughout the entire value chain of the global WAM industry, which is leading to disruption in every aspect of the industry.

Clients are first turning to robo-advisors for easy, fast and on-demand access to investment advice that is tailored to their specific needs. Asset servicers are adopting blockchain and smart contract technology, which is resulting in investment and process optimisation.

Portfolio managers are increasingly establishing more sophisticated computer models to supplement fundamental research, and investors are demanding more exposure to quant trading strategies. The opportunities for distribution are also increasing thanks to the dramatic increase in available investor information and the introduction of digital channels. Firms that seize disruption and FinTech and use them to identify new ways to increase productivity, ways for technology to partner with finance, ways to innovate to enhance the client experience and creatively deliver more value in their service offerings will ultimately grow their business and emerge as winners in the changing market.

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.

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