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Disrupting finance: How to save the Fortune 1000

Brokers replaced by algorithms, banks without physical branches, blockchain technology – the list goes on and on. Disruption is the story of the moment, and no industry should be warier than finance.

The disruption of finance is representative of the B2B fallout from the 'fourth industrial revolution': automation, big data, artificial intelligence, the Internet of Things, robotics, etc. The transformation these technologies are unleashing will impact not just companies that provide financial services but also the finance organisations of the Fortune 1000.

However, as well as posing a threat, the digitisation of business also provides an opportunity for established companies to re-tool themselves and improve. This is particularly true in terms of supply chain infrastructure, which holds the key to leaner processes, better use of data, financial visibility – and ultimately long-term success.

Disruption is here

The tech titans of Silicon Valley and beyond have trained their sights on the highest-margin financial services: Money transfers, wealth management, credit cards, etc. These newcomers have gained ground quickly, and in some cases, such as Venmo, have been absorbed into the establishment (the 'if you can’t beat ‘em, buy ‘em' model).

Others, such as Personal Capital, compete fiercely with incumbents for market share. Of course there are many more misses than runaway successes, but what is it about finance that makes it so vulnerable to disruption?

Why finance?

Finance is prone to disruption due to its moderate barriers to entry, vast digital versus physical infrastructure and wide-ranging product lines. Consider a behemoth like Bank of America Merrill Lynch or Wells Fargo. Their executive teams have to please shareholders by defending margins and market share on a wide range of lines of businesses, from mortgage lending to wealth management to trading desks. Recent moves towards ring-fencing disparate operations — especially in the UK — haven’t altered the fact that the majority of these divisions have to do well for the organisation as a whole to thrive.

Now consider a scrappy upstart. To excel, they need to disrupt only one of these businesses. For example, there are several rapidly expanding companies who have developed algorithms that purport to be better at judging credit risks than traditional banks. If this is true they can afford lower margins, which means charging lower rates, which could drain potential customers from established institutions.

Trust me

However, the big players do have a major advantage which could prove insurmountable to would-be disruptors if leveraged correctly: their extensive global infrastructure and presence, especially in emerging markets and hands-on services like investment banking.

To win customers, financial firms need to inspire confidence. One way to do this is with brick and mortar. If a prospective client walks down the street in Lagos, London, or Lima and sees the local branch of an international company, he’s a lot likelier to trust his money will still be there regardless of a missed funding round or a change in government. Many of the new FinTech companies exist online and in the cloud. This provides a number of advantages, but for anyone not digitally native or committed, it can feel a leap of faith.

But if the FinTech disruptors can offer a better product at a better price, sooner or later prospects will be economically inclined to migrate their business. Thus, the incumbents must keep their overhead and infrastructure costs in check, to be able to offer competitive pricing and still turn a profit. The best way to do this is through rapid and accurate data capture.

Data empowerment

There’s a whole class of learnings and action-opportunities falling by the wayside because of a lack of real-time data. This is of course, data relating to the internal not the external – namely the surrounding global supply chains and personnel. Historically, this data has either been neglected or refreshed on an annual basis, making it impossible make real-time decisions on scale or suppliers.

Now, with a new generation of platforms that enable companies to hire, buy, and gain visibility into their complex labour and supply chains, the Fortune 1000 can harness disruption to avoid suffering it themselves. Imagine the business gains for a financial firm — or to the CFO of any firm — if they could adjust their spend in real time based on changing conditions.

Need to rapidly resupply an essential product because of a supply chain disruption? That’s no longer a problem because business-to-business buying is catching up with consumer buying and leveraging the entire web. What if a local branch finds itself short-staffed at a crucial moment? It’s simple to source temporary or part-time help. Instead of being overwhelmed by change, large companies now have the chance to turn fluctuations into opportunity and remain a step ahead of their competitors.

Supply chains are less crucial for finance than in industries like logistics or transportation, but it would be foolhardy to ignore an underutilised competitive advantage. Many financial firms have spent decades building scale, now is the time to use it effectively to defend market share.

Charles Royon, VP EMEA, Tradeshift (opens in new tab)