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Why finance leaders should be worried - and where they might find salvation

roger trapp | forbes | 29 may 2015

This article first appeared in Forbes

By any measure, these are tough times for financial institutions and their leaders. Most obviously, the crisis of 2008 continues to haunt them, with barely a week going by without some fresh scandal or a reminder – through a fine or court case – of a past one. But – serious as the regulatory aspect is – it could be outweighed in its effects by increasing competition. According to a new analysis by PA Consulting, A Decade of Disruption, financial services executives could be in line for a nasty shock if they assume that things will carry on pretty much as they are at the moment. This benign view – that only a few alterations to the approach will be necessary – might turn out to be right. But PA suggests it would be safer for leaders to plan for something worse.

The report says “two profound changes” could lead to disruption. First, financial services organizations are operating in a society that actively encourages new entrants and that might hesitate or even refuse to bail out incumbents should there be a repeat of 2008. Second, they can no longer count on the “stickiness” or inertia of their traditional customers. As a result, leaders of these organizations should be asking themselves two urgent questions. First, will there be a period of sustained economic, political or social instability that is so severe government support is required for them to survive? Second, will there be a new entrant powerful and innovative enough to steal the most valuable customers? Depending on the answers to the questions, there are, says PA, four scenarios “with very different implications” that financial services businesses should start planning for.

Scenario 1 – Stay the course and make minor adjustments to the model.

Scenario 2 – Prepare for a period of sustained instability.

Scenario 3 – Prepare for the arrival of a dramatic new entrant.

Scenario 4 – Prepare for a radically different market

Decade of Disruption 350 x 210

Could Google be the next bank?

We explore four future scenarios financial services firms need to prepare for.

Download report

The report says that many banks have plausible plans for dealing with the first scenario, but have few clear ideas about what to do in the others. The reason for this, it says, “is that for many CEOs, it is difficult to know how to frame the challenge ahead of them”, particularly when they are often under immediate pressure to cut costs and respond to new regulation. Moreover, few management teams are good at the cannibalization of existing businesses that would be the most effective response to some of the possible situations set out.

Clearly, there will be no simple answer for such a complex problem. But PA encourages leaders to look at what is going on in the economy and society at large to help them decide on future strategies. It has identified five “realities” – general uncertainty, shifting trade and capital, socio-demographic change, new technology and the data and analytics revolution – against which leaders should stress-test their organizations.

Above all, the report calls on leaders to think differently. “This may call for fresh products, new partners and even the recruitment of a different type of employee. The customer will be central to business design, meaning the mission of the organization may look different to today,” it says. This may appear daunting, but PA points out that some leaders are already starting to drive innovation, develop new partnerships and build on some of the advantages they have, such as regulatory clearance, access to capital and substantial numbers of existing customers. Andrew Dawson, head of financial services strategy consulting at the firm and author of the report, regards as particularly important the approach institutions take to “all the information coming at them” and developing the ability to make decisions much faster through analysis of data.

Those needing encouragement in this brave new world should take a look at Smart Money (Basic Books), a recently-published book by Andrew Palmer, an editor at the Economist. While anxious not to be seen to be an apologist for an industry that has become demonized in the public view, he is also concerned that we not forget the great potential for finance to help make the world better. Indeed, a central part of his argument is that at a time when governments can no longer afford to do all the things expected of the state – whether because of a resistance to high tax rates or because problems are just too huge, complex and expensive – the opportunities for finance to make its mark have never been greater. Challenging the popular notion that the problem with finance is its fondness for innovation or – to put it, more contentiously – wizardry, Palmer writes: “When societies confront big problems, finance tends to be involved in the solution.”

To illustrate his point, he describes how schemes as varied as social-impact bonds, whereby private investors fund social programs on the basis that they will receive a return if targets are met, and an initiative that uses the enthusiasm for lotteries to encourage people to save can sit alongside other social enterprises in showing how innovation in business – and by extension finance – serves the public good. These are all examples of what the Nobel Prize-winning economist Robert Shiller was talking about when he said in a debate on whether talented graduates should work for Google or Goldman Sachs at an Economist conference in 2013: “You cannot do good for the world by yourself. Most important activities have to have a financial basis.”

Of course, such is the reach and ambition of Google that in the future one might be working for Google and working in finance. Indeed, PA is promoting its report on the scenarios facing financial organizations under the heading “Could Google be the next bank?”


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