DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY, Part 2

  (Source: Charles Schwab)

The Banking Industry of the Future

The securities industry can be regarded as the first sector in the financial industry to have embarked down the path of modularization. Mutual funds was the first major area involved in this first step toward modularization. Mutual funds are now mainstream products of banking and wealth management. The banking industry should not overlook the following episodes.

The mutual fund business model can be broken down into two process areas: 1) selecting investments or investment destination (portfolio building), and 2) sales of the created mutual funds. In the former, the products (portfolio) are designed and created (produced), while the latter involves the sales of investment firm securities (mutual fund beneficiary certificates), with sellers undertaking the office processing such as customer transaction reports.

In the closed model era of brokers and mutual fund firms, the norm until the 1960s, mutual fund firms would outsource sales to securities companies (full service brokers). This resulted in mutually beneficial consignment-based relationships between the investment trust companies and securities firms that endured for a long time with a fixed fee structure (investment sales commissions paid from the customer to the securities company) and securities trading fees (paid by the mutual fund company to securities company). These sales formats have since diversified.

No-load funds entered the market starting in the 1970s, spurred on by the liberalization of commissions for the brokering of securities, sluggish demand in the stock market, and the emergence of discount brokers that did not offer investment advice. This era was characterized solely by diversification of sales methods, and was entirely absent changes to the closed model that covered planning, manufacturing, and sales.

However, change descended on the market in the form of the mutual fund supermarket revolution. With the launch of Mutual Fund OneSource in 1992, Charles Schwab offered multiple funds that customers could purchase without paying a commission, but for which Schwab’s mutual fund management arm collected an annual management fee based on asset balance. Metaphorically speaking, this approach was akin to companies putting mutual funds on the shelves of a supermarket and charging commissions only for the products sold. The interface between mutual fund companies and securities companies opened up, and the creation and sales components were decoupled and functionally modularized.

More change is on the horizon. An era is coming in which the banking industry should orchestrate a shift to a structure that hinges on modular demand to respond to new needs fostered by digital technology and the new demand of the emerging digital generation.

Industry players should be ditching vertically integrated direct sales, or so-called keiretsu, which are tantamount to direct sales routes; instead, they should establish delivery models that are more dynamic and open. Omnichannel initiatives are not only opportunities for firms to launch or shut down these channels, but also to revisit and reconsider their optimal delivery model. Moreover, collaborating with non-financial sector players, including start-ups, opens the door to the possibility of accessing vast and new untapped market frontiers.

Robo-advisor initiatives can be expected to accelerate the speed of advances in modular demand structure. Presumably, coming delivery channels will seek to optimize information and investment expertise, driven by approaches that respond to the needs of investors by providing automated advice and harnessing bankers as human support mechanisms.

To be continued – Click here

 

Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2

 

DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY

  (Source: Apple)

Modularization of Industry

Industries across the board are undergoing structural change. This change extends beyond individual firms and spills across industrial sectors. Some industries that have been exposed to the tide of technology-driven structural changes have harnessed technology to reinvent themselves as new industries befitting this evolution in industrial structure. The financial industry traditionally has been far from the vanguard of this change.

The proliferation of the Internet and digital technologies is only accelerating the evolutionary shift across all industries. This stands in stark contrast to the traditional non-modular, vertically integrated structure (where all the products and services are provided through and within one exclusive value chain) that the industry has historically embraced. However, disruptive new market players have visibly forced conservative, existing entities to begin to seek new approaches; at the same time, regulatory authorities have started to embark on establishing a new, more robust system for regulating the financial industry.

The hotel industry offers a prime example of modularization on the demand side. Today, hotels, as well as the entire travel industry, offer consumers the experience of comparison shopping across service, price, and quality. Celent refers to this phenomenon as modular demand.

Modularization on the supply side is perhaps best exemplified by the aviation industry. The aircraft industry intrinsically does not lend itself to being a self-contained business, relying on a variety of actors to make, operate, and commercialize aircraft. Technological innovation, deregulation, and cost pressures transformed the airline industry, spurring it to evolve into a quintessential modular structure on the supply side.

This modularization goes beyond the industry infrastructure that includes airports and ground facilities. All components of the value chain — from in-flight services such as meals and movies to ground services such as boarding and baggage handling, as well as aircraft maintenance, flight plans, management, pilots, and cabin attendants — are now all subject to external procurement. The airline business now hinges on corporate management’s adeptness at forging and managing alliances. At Celent, we refer to this phenomenon as modular supply.

Today’s music industry showcases some of the greatest modular advancements. On the demand side, the industry saw a shift in the listening experience, as consumers moved from CDs to online downloads and streaming. Dramatic technological advancements have enabled music distribution sites and social networking services to tailor recommendations to users, offering songs and videos to suit music preferences and enabling consumers to search for, purchase, and enjoy music in real time.

On the supply side, record labels and their vertically integrated model were initially largely blindsided by innovation because musicians no longer needed to rely exclusively on CD sales or being scouted, signed, recorded, and promoted by record companies. The ensuing change saw a shift to a new model where a diverse range of artists recorded themselves and harnessed social media and trendsetters to promote their colorful charm and generate fans. Both the supply and demand sides of the music industry value chain underwent a dramatic upheaval that shook the industry and spawned a more dynamic and open industry. This resulted in a new life for the music industry that relegated the CD and conventional business practices of music labels to history.

To be continued – Click here

 

Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2