A survival guide to disruption risks in the B2B financial services industry

In my previous article, I reflected on the multiple factors of disruption that may affect the B2B financial services industry. I now turn my focus to strategic actions that can be undertaken to preempt, mitigate, or even take advantage of the resulting opportunities. By financial services industry, I refer to commercial banking, capital markets, leasing, insurance and investment management.

Stay alert, build your watchtower

Establishing an “observation post” in each business unit is a good first step. This proactive measure involves gathering intelligence on emerging players, especially new platforms, and monitoring the testing and rollout of new technologies such as blockchain and generative AI. Tracking strategic moves by existing competitors, particularly those involving Fintech acquisitions is also important. The findings could be compiled into a quarterly report circulated internally.

This disciplined approach not only makes the organisation mentally ready when something unexpected happens (an announcement by a competitor for instance, or a large transaction lost to a newcomer), but also contributes to building an innovation-centric culture.

Track the Fintechs but watch-out for the big players

Fintechs are agile entities not burdened by the incumbents’ way of working. They come up with great ideas, develop their proposition in no time, but then face issues of trust as well as perceived reliability risks. Corporate customers do not have the time or energy to try out new solutions with them. The danger comes when they partner with, or are acquired by a large player, whether an existing financial institution or a Bigtech, and their solution is integrated into an “institutionalised” offering. Hence, while innovation mostly originates in Fintechs, the threat comes from the big players.

Maintain humility, for disruption spares none

Disruption may initially seem confined to specific segments of the value chain, creating a false sense of security about one’s business model. For instance, the bond issuance process has largely been unchanged over the past few decades, being primarily based on the investment bank’s relationship with issuers and investors and their ability to advise them. At the same time, e.platforms for quoting targets on private placements, for book-building or for new issue info distribution are becoming mainstream. Also, new solutions for documentation and blockchain based settlement have surfaced. So in this case the risk is to believe that the investment bankers’ role in the new issuance process will remain unchanged even when it seems that everything around it is moving to the digital age.

Follow adjacent areas, disruption can spread like a virus

In some cases, disruption starts with an obvious product before moving to an adjacent one. For instance, forex platforms have existed for years, pitching banks against each-others to obtain the best quote for the customer, and are expanding to the derivatives market. Also, Supply Chain Finance platforms have been a serious competitor to banks for a while, reducing them to the role of funders and risk takers, and similar platforms have entered the Purchase of Receivables area. What’s next?

Think outside the box, like the disrupters do

You may be taken aback by the irruption of a disrupter, especially if you focus only on your current offering. Instead, the whole value chain should be investigated, not just the outcome.

For instance, in this recent article, Matt Brown explains that in B2B payments, an area with an immense potential, the real issue isn’t actually about the payment but instead about the workflows and data that are a precursor to the payment being made. He concludes that the most successful “B2B payments” companies won’t probably look like payment companies at all, and therefore will possibly come from outside the financial services industry.

Industry convergence between financial institutions and the industries they serve is also a trend to watch-out, like when merchants embed financial products in their offering. In this context of moving industry boundaries, it is wise to shift the focus away from who you are as a financial institution and instead think about the wider market: what are the key value units being exchanged and what is your role in that process.

Take the corporate customer angle, they are the judges of what will fly or die

A pivotal aspect in weathering disruption is adopting the corporate customer perspective. Disruption is rarely product specific: instead new players aim at addressing a customer’s jobs-to-be-done, like liquidity management for a corporate treasurer. Their solution therefore happens across a given financial institution’s in-built product silos, like in this case the different units in a bank providing cash management, trade finance, forex and working capital management. Therefore, instead of trying to improve your existing products and services, you should reassess how they fit into the customers’ jobs-to-be-done.

Also, try to anticipate their future needs, not just respond to them, and reflect on novel ways how they can be met. To illustrate, most financial services can be thought of as subscriptions in disguise. So what about getting inspiration from subscription based businesses to change the way you offer and charge for the services you provide, before someone else does it.

Analyse your existing and future competitive advantages and build on them

When looking at the existing operational and business model, do not overestimate your institution’s historical role and what have been the perceived competitive advantages, like a large balance sheet for a bank. Instead focus on what is difficult to copy or replace, such as trust, customer-knowledge based advisory, or proprietary data sets. Also, uncover your firm’s capabilities which have so far only been used internally and could be commercialised, like fraud management in an insurance company or credit risk evaluation in a bank.

Be ready to be a first mover and disrupt yourself before others do

For instance, when the innovation by a Fintech is potentially threatening some elements of your business model, you may be tempted to disregard the threat on the assumption that they don’t have the financial clout, the credibility or the reach to be successful. Alternatively, you could consider that it is probably only a question of time before this type of solution will emerge at scale. In which case it makes sense to investigate how to replace the existing business model (or part of it) with this new one, even if it is painful at first.

Keep options open and stay agile

As I discussed in an earlier article, interoperability is becoming a precondition for financial institutions to keep a high level of agility, like creating or participating in platforms, forming an ecosystem of fintech partners, or simply integrating into their corporate customers’ systems. To achieve this goal, they need to overhaul their business and IT architecture and move towards portable micro-services (or modules) connectable with APIs. I know that it is easier said than done given the maze of legacy systems, but should be the vision anyway.

Be smart and bold

All-in-all, I believe that the best way to get prepared for the inevitable disruptions is to observe the market and listen to customers, upgrade the operational and business model for the future and dare to take advantage of opportunities.

Jean-Francois Tapprest