Thetitleofthispostwasinspiredbythe1996documentary“WhenWeWereKings,”abouttheheavyweightfightof1974betweentwoboxinglegends,MuhammadAliandGeorgeForeman。

Inthenot-so-distantfuture,itwillalsobeafittingphraseformanyinthebankingandinsuranceindustries。

ReadersmayaskwhyIamtalkingaboutbankingandinsuranceinsuchdoomsdayterms。

Mybleakforecastdoesnotstemfromthenotionbehindthecommonfintech(financialtechnology)andinsurtech(insurancetechnology)industrypitchthattheywillchangetheirrespectiveindustrieswithinnovationandbettercustomerexperiences,althoughIfirmlybelievethatsomeofthestartupswillcausesignificantpaintotheincumbentsandwillindeedchangetheirrespectiveindustries。

Oneday,someoftheexistingandas-yet-unlaunchedfintechandinsurtechcompanieswillalsobecomeincumbentsthatotherstartupsaimtodisrupt。

Therealthreattothefinancialindustrywillcomefromaradicalapproachtopenetratethefinancialmarket—anapproachthatIbelievehasnotyetbeenaddressedorevenconceivedbythecompetition。

Theemphasisisclearlyon“yet。



Whatisthisnewconcept?

Itissimplythis:offeringfinancialservicesatorbelowcost。

Ihavemootedthisideaatmanythinktankevents,andIthoughtIshouldwriteitdowntoshareitmorebroadly。

Itis,andshouldbe,aterrifyingthoughtformany,andIstronglybelievethisapproachwillbeimplementedinthenearfuture。

Itwillbringmanyoftheincumbentstotheirknees,unlesstheyprepareforwhatistocomebyinvestingintechnologyandadaptingradicalbusinessmodels。

Peopletalkaboutthelimitedimpactoffintechandinsurtechontheincumbentbusinessmodel。

Imustagreethatatthispointmanystartupshavelittleinfluence,ifyoulookonlyatthecustomerstheyhavetakenawayfromincumbents。

Whatthestartupsarealreadydoing,however,isforcingmanyincumbentstolowertheirfeestobettermatchwhatthesmallerplayersoffertotheirclients。

Moreover,startupshavealsochangedcustomers’expectationsoftheuserexperience。

Startupswillalsouseartificialintelligenceandmachinelearningtocompeteagainsttheestablishedfinancialplayersthathavemoreresources—suchasmoney,dataandclients—athandtocompete。

ThereisnowayaroundinvestinginAIandmachinelearningtocompetesuccessfullyagainsttech-savvycompetitors。

Manystartupsandlargecompaniesalreadyusemachinelearningalgorithmstobuildbettercreditriskmodels,predictbadloans,detectfraud,anticipatefinancialmarketbehavior,improvecustomerrelationshipmanagement,andprovidemorecustomizedservicestotheirclients。

Arguably,thebiggesteffectofstartupsisthattheycontinuouslyputpressureonincumbentprofitmargins。

Startupswillcontinuetotrytochangethestatusquobecausetheysmellbloodintheincumbentwater。

Therealandbiggestthreattoincumbentswilllikelyoriginatefromtechgiants,suchasAmazon,AppleandFacebook,andotherbignon-techcompaniesthathavelargecustomerandemployeebases。

Theseorganizationswillusetheircustomersandemployeestosellbankingandinsurancesolutions,andthebigfinancialinstitutionswillbecomeatbestdumbpipes。

Thetechnicalapproachestodoingbusinesswithinthefintechandinsurtechindustriesmayprovidesomeofthetoolstechgiantsandotherlargecompaniesneedtoexecutethisstrategy。

Iknowsomereaderswillsaythatregulatorswillstopanyattemptbynon-traditionalplayerstoprovidemanybankingandinsuranceservices。

However,Idonotthinkregulatorscanorwillstopthenewcompetitors,becausethesecompanieswilleitherobtainthenecessarylicensestooperateorhaveabankorinsurerprovidethird-partyfinancialservicestothem。

Thisstrategyisnotunlikethewaysomefintechchallengerbanksusethelicensesofanexistingbanktooperate。

Whyshouldweexpectthisscenariooffinancialindustrydisruptiontohappen?

Inourcase,weallseemtoagreethatthetechgiantsaretheonestofearbecauseoftheBigDataplatformandtechnologyknowledgetheypossess。

Inaddition,techgiantshaveseveraladvantages,suchasthetrustfactorandtheconstantinteractionwithsatisfiedcustomers。

Furthermore,studieshaveshownthatmillennialswouldprefertobankwithtechgiantssuchasAmazon,Facebook,orGooglethanwiththeexistingbankingplayers。

Andlastbutnotleastarethetechgiantsandstartupsthatkeepsettingthebarhigherforexceptionalcustomerexperience(forinstanceApple’ssimplicityorAmazon’sinstantgratification)andshapetheclientbehaviorandexpectations,nottheincumbents。

Allthatspeakstotechgiants’favorablecircumstancesasseriouscompetitorsthatarenotyetreadytocomeinatfullspeedandhitthefinancialindustrybroadly,butitdoesnotpointtotheneedtofearanextremedisruptionasIprojected。

Idonotbelievewewillseethosetechgiantsprovidingwhole-spectrumfinancialservicesanytimesoon,buttheyhavethepotentialtoofferservicesincertainsegments,suchasprovidingpayment,lending,orinsuranceoptionsfortheircustomersandemployees。

Whatisterrifyingtoimagineisasituationinwhichtechgiantsorotherbigcompaniesprovidefinancialservicesolutionsatorbelowproductioncosts。

No,thatisnotatypo;Imeanprovidingfinancialservicesfornothing—forfree。

Ifwetakethisscenariotoitsextreme—thatis,sellingbankingorinsuranceservicesfornothing(yes,forzeropounds,euros,dollars,orrenminbi)—thenwehaveasituationinwhichfinancialinstitutionsintheirpresentformswilldieorbereducedtoshadowsoftheircurrentselves。

Thatcanandwillhappen,andhere’swhy:Largecompaniescoulddoexactlythat—sellatorbelowcost—towinorkeepcustomers。

Thenewcompetitorswouldnotneedtoearnmoneyandcouldevenaffordtolosemoneyinofferingfinancialsolutionsifthesefeaturesenticecustomersandnewpotentialclientstousethecompanies’coreofferings。

RememberthatFacebook,forinstance,earnsthebiggestportionoftheirprofitsthroughadvertisingbecausetheyhavecreatedagreatplatformthroughwhichpeoplelovetointeract。

Financialsolutionswouldbejustanothergreatoffering(especiallyiftheyareofferedforfree)toenticemanypeopletojointhetechgiants’ecosystems。

Alternatively,carcompaniessuchasGMcouldprovidetheiremployeesandcustomerswithverycheaporno-cost(nocosttocustomers,atcostforthecompany)bankingorinsurancesolutions。

Don’tforgetthatbankingandinsurancesolutionscanbeprovidedatverylittlecostaswhite-labelservicesfromthirdpartiesthatalreadyhaveallthenecessarylicenses,technologyandinfrastructure。

Allisnotlostforbanksandinsurers,butitwillbeveryhardforthemtocompeteagainstsavvytechgiantsontheirtechnologicalhometurf。

Thefinancialindustrymustthinkfasttofindwaystocompetebeforetheirbusinessoxygenrunsout。

Onesolutionthatbanksandinsurersshouldpursueaggressivelyistoembracethefintechandinsurtechindustriesfortheirinnovativebusinessspiritandfast,directexecutionapproachtonewideas。

Thatmeansfinancialinstitutionsshouldbuywhattheycanorpartnerwithstartupstomakeupforalltheshortcomingsthatlegacybrings。

Sizeandregulationwillnotbeenoughtoprotectincumbentfinancialinstitutionsagainstnewcompetitors,aswehaveseeninmanyotherindustries。

Anotherideamightbeforfinancialinstitutionstoplaceadvertisementsontheirwebsitesorappstocompensateforlossofprofitmargins。

Idonotthinkthisistheonlysolution,butfinancialinstitutionsmustinnovatebeyondtheircoreareasofexpertiseandstandardindustrypractices。

WhydoyouthinkAmazon,Uber,andAirbnbhavebeensosuccessfulatdisruptingtheirindustries?

Becausetheythoughtandactedasiftheyhadnothingtoloseandeverythingtogain。

The“atorbelowcost”approachtofinancialservicesolutionsisnotafar-fetchedscenariofortechgiantsandothercompaniesthataretryingtofindnewwaystoattractandkeepclients。

Thebankingandinsuranceindustriesmustatleastgetverycomfortablewiththeideathatlow-costorfreefinancialservicesarecoming。

Atsunamiisoftenunnoticedintheopensea,butonceitapproachestheshore,itcausestheseatoriseinamassive,devastatingwave。

Thefinancialindustryneedstodetermineifthethreatbytechgiantsandnon-techcompaniesisasmallwaveoratsunamiandprepareaccordingly。

Myrecommendationtoallfinancialinstitutionsisthis:You’dbetterprepareforatsunami,evenifallyouseeisasmallwaveonthehorizon。

Readmoreinmynewwhitepaper“MachineLearninginFinancialServices:ChangingtheRulesoftheGame。