Consulting firm says "start again" to innovate; a different take on fintech
Friday, February 1, 2019
By Ted Knutson
A typical annual state-of-the-industry report might include a compilation of key performance indicators, economic projections and demographic trends. Consulting firm Oliver Wyman's 2019 state of the financial services industry report is different: It is a greenfield blueprint.
Greenfield, as Oliver Wyman defines it, is “a method for existing firms to build new businesses. A project starts with a specific customer need, often identified from existing customer data, in an area that is already strategically important, or to kick-start expansion. It needs to develop compelling customer solutions and evolve them quickly, using the flywheel effect,” which is how a new venture builds momentum through favorable economics and customer adoption.
Greenfield provides a route to overcoming legacy constraints and bringing technological innovation to the fore, which, Oliver Wyman argues, takes a financial institution back to square one or, in the words of the report's title, “Time to Start Again.”
It is not quite the same as the way fintech has evolved in recent years. Whereas many start-ups initially set out to drive legacy banks out of existence, entrepreneurs today are more inclined to partner or collaborate with established financial companies.
The fintech cooperation model may be subject to revision.
“The goal is to combine the best of both worlds - the technical know-how, transformative thinking, and entrepreneurial culture of fintechs with the industry expertise, capital, and brand power of incumbents,” Sam Friedman, insurance research leader, and Michelle Canaan, insurance research manager, Deloitte Services, explained in a January 9 blog post. “Yet, realizing this vision often turns out to be quite complicated and even frustrating, to the detriment of fintechs and FIs [financial institutions] alike.”
Although “fintechs will likely continue to drive financial services transformation, serving as a marketplace for innovation,” they concluded from a recent study, “incumbents and fintechs probably have a long way to go before settling into a more systematic, truly symbiotic relationship.”
Oliver Wyman is challenging assumptions that “it will require years of digital transformation of legacy systems and processes” to modernize the complex and slow-to-adapt financial industry infrastructure, according to Ted Moynihan, the firm's managing partner and global head, financial services.
“In our state of the industry report this year, we challenge that consensus, and make the case for starting again,” he writes in the report's preface. “We don't mean new challengers or fintechs taking over. We mean giant financial services firms freeing themselves from the shackles of their legacy infrastructure and embarking on their future journeys unencumbered.”
To illustrate what incumbent banks are up against, Oliver Wyman says that it costs them about $150 to acquire a new current account customer, five times the comparable expense of digital challengers. Existing banks take three days after a consumer's application to make a new account accessible, while digital account access can be almost immediate. Launching a new feature takes an established bank three to six months, a digital challenger two weeks.
The transformative greenfield approach “means brand new technology, entirely new organizations, and complete customer-centricity,” Moynihan says.
According to the report, “A venture approach is taken, with investment stage-gated. The venture has freedom to operate from the rest of the organization and to deploy new technology.
“A greenfield build is forced to meet the needs of surrounding stakeholders - risk management, compliance, regulators - and is not a theoretical innovation project.”
Oliver Wyman says that “incubation of a portfolio of investments is needed - with ruthless prioritization and a structured probe-learn-pilot approach.” It is critical of “efforts today in innovation [that] can provide the impression of activity, but lack discipline, access to customers or top-down backing.
“The one or at most two initiatives that stand a chance of really scaling up - generating over 10% of the firm's revenue - should then become a major focus of the organization,” the report continues.
“At the same time, the performance and productivity of the core business needs to be optimized. Those businesses which are no longer going to drive growth, no matter how profitable today, need to be identified so resources can be freed up.”
Greenfield can have the cultural effect of accelerating change - “The institution's conventional wisdom gets heavily challenged during a greenfield build, something that is not always comfortable” - and “improves access to external innovation. Partnerships can be established quickly, with the attraction of a real customer base, and offerings or services integrated into an open integration layer fast.”
Access to cloud computing and other technologies at favorable cost is a greenfield success factor, Oliver Wyman says: “Greenfield should deliver a technology platform that is scalable, has a variable cost base, enables fully digital experiences, provides flexibility to swap components out, and can be iterated to meet the needs of both customers and the business users.
“This will typically be assembled from modular microservices that are integrated with APIs. These technologies are cloud-based, scalable, and generally offered as software-as-a-service.”
Backing from the parent CEO was critical for Mark Bailie, CEO of BÓ, a greenfield digital bank launched by Royal Bank of Scotland, which Oliver Wyman presents as a case study.
“Unless the CEO is driving the vision, there's no point in starting, and the board needs to be willing to back the CEO,” says Bailie, who was formerly group chief operating officer of RBS. “If these elements hadn't been in place, we wouldn't have started.”
He says it was also important to separate the new venture from the core business - albeit with executive-committee-level sponsorship - and to “build it within your existing risk appetite framework . . . You have to build these things so they can co-exist together in the long term.”
As Bailie describes the greenfield decision-making process: “We took a very small amount of money and gave ourselves three months to see if we could put together a proof of concept, using enough of the components, and make it work. Having done that, we went to the next step, to see if we could make it work in a real-time environment with live connection to payment rails. Once we got there in the time period we'd set, the next step was to put it into a production environment, and then into beta.”
In Oliver Wyman's flywheel scenario, the report says, “New business models and data-driven approaches are winning over customers . . . Features are launched and tested with customers rapidly. Eventually, it is difficult for competitors to even catch up.”
GARP editor-in-chief Jeffrey Kutler contributed to this article.