Luxembourg: Fintech's Disruption Standoff: Just Who Is Disrupting Whom?

Last Updated: 22 November 2016
Article by Pascal Denis

Most Read Contributor in Luxembourg, October 2017

A population roughly one tenth the size of Luxembourg's gathered in Lisbon, Portugal last week for the 2016 Web Summit. It was a neutral ground for start-ups, tech giants, and the old guard to come together and discuss technological changes and visions. But back in the real world these factions are in constant battle as they vie for customers. How should Luxembourg's existing financial players position themselves for the coming 5-10 years?

You've GAFA be kidding me

Google, Amazon, Facebook, and Apple ("GAFA") are giants whose bankable achievement has essentially been winning enormous databases. Google can catalogue their users' search activity, Amazon purchases, Facebook demographics, and Apple media preferences (to oversimplify). The data thus wielded opens up a host of other business directions, which is why when Google talks about AR, or Apple about payment, people listen. In the finance world these database powerhouses could pose a threat to incumbents and start-ups alike.

So, asks Warren Mead of KPMG UK, what will be the role of banks in 5-10 years' time? Currently banks have a monopoly of services that's being chipped away at by different FinTech specialists. The inherent suggestion is that banks should be wary of their old "one-shop-stop" status and start thinking about the specific value that they, and only they, can bring to customers—keeping in mind that nobody else is offering a single-shop model either.

Start-ups and end-downs

Start-ups have the dubious job of astonishing their elders. They are free to poke at every pitfall of existing systems, but must also work to defend their own capabilities. Their first challenge is to have a suitable answer for why they should be any better at technology than the already-proven GAFAs—a question posed to them relentlessly at the Web Summit. "If Google couldn't make a competitive product against Facebook then what makes you think you can?" asks one panellist at the pitch competition. "If Google is the rear-view mirror, then we are the windscreen," explains a different pitch candidate. "It's like Facebook for dogs," pleads one young CEO.

And yet, with the trend seeming to still go towards hyper-specialisation, there is room for start-ups to take over certain processes with an efficiency that an incumbent couldn't dream of doing, and a GAFA perhaps wouldn't think to bother with. If you think on a global scale, what initially looks like a mere niche could actually contain a billion-dollar business. In the race to digitalise finance, some of these currently small companies are sure to play a large role.

Financial institutions, substantial evolutions

The third party of the stand-off is of course the establishment. What are financial institutions doing today to, as Mark Wilson of Aviva artfully puts it, "build relevancy"? Innovation labs have been a clear tactic for some. While speaking against innovation labs (in a debate wherein he was instructed to do so), Mike Laven of Currencycloud spoke of structural and cultural roadblocks: system replacement projects range up to half a billion dollars and are exceedingly complex ( as Nomura found out); and regarding culture, he asks: do you even want your bank to be innovative? If a third of all start-ups fail, perhaps it's an unpleasant experience if your trusted institution picks up the same attitude. In practice, innovation lab interns are using the big companies who hired them to network, score a pay-check, build their own industry knowledge, and maybe strike investor gold.

A persuasive counterargument comes from Mr Wilson of Aviva. The insurance giant is as establishment as they come, with 33 million customers and a three-century history. It finds itself in an industry which Mr Wilson termed the "last frontier" of innovation. After trying and failing to generate next-generation products from within, Aviva tried putting finance experts, data scientists, engineers, entrepreneurs, "start-up magicians" and more in a garage in London: the result was a product that's starting to bring in huge profits. Mr Wilson is very emphatic about the need for Aviva to, as he puts it, "compete and cannibalise." It's crucial, he says, to "destroy the very business we spent 320 years building up." He openly addressed the start-ups in the audience when he said he's committed to partnering with, funding, or buying them.

Equilibrium... for some

The takeaway might be that it may be possible for start-ups, tech giants, and established companies to coexist, but there are no guarantees for who does and doesn't. Established companies are obviously under the heaviest threat, with the least agility and the most to lose. Yet if a company who can claim Isaac Newton as a [former] client can remain relevant in 2016, then it proves that no firm is inherently precluded from thriving in the customer-centric and data-driven digital age.

Tomorrow has arrived

From hosting Luxembourg's first FinTech awards earlier this year to our longstanding involvement in the traditional financial sector, we've been able to get an inside look at innovation within the industry. We've helped companies locate and partner with FinTech companies, and vice versa. Please contact us should you wish for more information.

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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