The financial service industry's deep relationship with information technology goes back nearly a century and a half, starting with the telegraph and a transatlantic cable that shortened the length of stock transactions between the U.S. and U.K. from six weeks to a single day. From that moment forward, technology and finance were inseparable. Big banks became early buyers of mainframes, workstations, personal computers and, eventually, smartphones. The industry even created its own advanced, purpose-built solutions like ATMs and Bloomberg terminals. And banks went online before most other blue-chip companies knew what a browser was.
In nearly every generation of technological change, financial services firms have found ways to harness new technologies to drive better performance for their products and organizations.
Paradoxically, this early lead in technology has put the financial services industry in a precarious position today. Investments in once-modern but now outdated technology, multiplied by new regulatory challenges and cybersecurity threats, make it incredibly difficult for financial services firms to adapt to the new realities of today's digital world.
Once merely a nuisance, this lack of technological savvy is putting leading financial services firms farther and farther behind the times when it comes to serving consumers. The "Millennial Disruption Index," a survey looking at how 10,000 Snapchatting consumers think about various industries, found that banking is at the highest risk of disruption in the coming years. In fact, 73% of those questioned would be more excited about a new offering in financial services from Google, Amazon, or Square than from their traditional bank.
Today, an onslaught of new technologies from startups and seasoned technology companies alike are emerging with little baggage to meet these new consumer demands. Many of these upstart services are friends, not foes, of financial services incumbents. But new partnerships need to be forged. New digital services must be launched. Regulation needs to evolve and bureaucracy has to be abated. Legacy architectures, opaque and complex regulatory environments, and the skepticism of innovation coming from the outside will have to be grappled with if the industry is going to thrive in the 21st century.
A New Era of Digital Finance
Ten years ago, who would have predicted that the most important player in consumer finance might be the company that sold us our MP3 player? Or that a Silicon Valley upstart called LendingClub would facilitate billions of dollars in loans in a matter of years through a virtual marketplace connecting borrowers and lenders? Digital disruption in financial services is reaching escape velocity, whether through peer-to-peer lending, personal wealth advice delivered sans humans, or APIs that turn manual banking processes into programmatic ones.
The financial institutions that will find themselves on the right side of these trends are those willing to reimagine the business theyre in and the services they offer. Transformation will come through a combination of opening up existing assets and data to allow for widespread innovation, capturing and coordinating new information to deliver dramatically improved consumer experiences, and finding ways to drive digital workflows whenever possible.
For insurers, this means leveraging the wealth of new data sources to challenge longstanding actuarial assumptions, offering better matching of rates and corresponding risk profiles. This same data gathering and analysis is transforming everything from stock picking and credit card fraud detection to predicting the pricing of commodities. Lenders need to digitize the process. And banks may need to build API layers on top of traditional infrastructure, allowing developers to build currently unimaginable apps for consumers to manage finances, report expenses, and make transfers.
To tackle these opportunities, change first has to come by looking inward. Financial services organizations that move slowly internally are likely even slower when it comes to interacting with customers.
Internal change is part technological and part cultural. No one would fault the financial services sector for skimping on technology budgets, with the industry spending $300 billion each year. But firms should focus on the quality of investments in cybersecurity and technology.
Of course, banks and other financial services institutions will only get there if the technology offerings presented to them support complex regulations and remain protected from the litany of new cybersecurity threats facing the sector. Silicon Valley and the tech industry broadly must work to find solutions that can both modernize banking infrastructure while addressing regulatory and cybersecurity challenges. This will require an ongoing partnership between lawmakers, tech companies, and the financial services industry.
Every category of finance is going to change during this decade. Financial services firms have the assets, scale, and mindset to make this shift. The only question now is which players will see it through.
Aaron Levie is co-founder and chief executive of the cloud computing company Box.