Future of Financial Services special report 2017

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INDEPENDENT PUBLICATION BY 23 / 04 / 2017 #0445 raconteur.net REVISED PAYMENTS DIRECTIVE (PSD2) FUTURE OF FINANCIAL SERVICES "It's not that people in banks are bad people or have bad intent or don't really understand what's going on in the tech- nology world," he says. "It just seems very risky to embrace the newer technologies. That is the problem we see across many in- cumbents in many different industries." Kerim Derhalli spent almost 30 years in the City and more than ten years as a managing director at Deutsche Bank before leaving in 2012 to set up investment app Invstr. Like the ex-Barclays boss, he believes there is "a lot of inertia in the commercial mindset". Also, a lack of technical knowledge at the very high- est echelons is holding back progress, he says. "Bank management is largely techno- logically illiterate," says Mr Derhalli. "The people who are running large organisa- tions are running them because they were great with clients or they were great with managing risk or they were great at design- ing products or, frankly, they were just fan- tastic political animals." Financial institutions realise this and are taking action. Andrew Brem, Aviva's chief digital offi cer, says: "The whole of our group executive and non-executive board have been out multiple times to Silicon Val- ley and to Asia to experience big and small digital businesses fi rst hand. We train them on technological subjects – cyber security, software in the cloud. "Of course, they are not going to be ex- perts, but they are absolutely aware that they need to know these things at least as a point of curiosity." "You have to pull the tiller incredibly hard to move a big business," says Mr Brem, who joined Aviva in 2014 from a re- tail background. "You have to be almost caricatured in your behaviour, you have to be iconic." Aviva's chief executive Mark Wilson is a perfect example, he says. Mr Wilson established a "digital garage" in trendy East London as a physical embodiment of Aviva's digital strategy and has given Mr Brem significant budgetary support. "The important thing is just to make a bet and get fully behind it," says the Aviva digital chief. Mr Jenkins believes creating external organisations which stand alone from the mothership is the only way large financial companies will really be able to transform themselves. And it is transformation, not innovation, that is required, he argues. He recommends building a separate "challenger" organisation that can rise like a phoenix from the ashes of the legacy player. "Ultimately, what may happen is, once the new business is very successful, then they can begin a process of migration on to the new systems," he says. Transforming a large institution into a digital-focused, mobile-first, cloud-ready organisation is a five to seven-year jour- ney, Mr Jenkins says, adding: "When I started to work on 10x, there were a lot of people who thought they'd got it covered and thought that the changes weren't go- ing to be as significant. "Now I find many bank CEOs thinking a lot about this and being concerned about it. They've moved from thinking there wasn't an issue to trying to solve it – that's happened in the last 12 months even." The paradigm shift is underway. Get the Report on AI for Fighting Fraud at: www.Feedzai.com/Know-The-Difference KNOW THE DIFFERENCE. FIGHT FRAUD OR CHURN CUSTOMERS. The scale and speed of the digital revolution has left major players in the fi nancial services sector struggling to keep up OVERVIEW WATCH OUT, BLOCKCHAIN JUST WENT MAINSTREAM No longer a mystical concept, applications for blockchain are on the rise 02 London's prowess as a global fi ntech centre of excellence faces the challenge of Brexit Regulatory technology is helping organisations tackle compliance, manage risk and bust fraud An EU directive aimed at improving customer service is set to open up data – and banking COMPETITION TO CLAIM THE FINTECH CROWN SMART MACHINES SPOT FRAUD AND ASSESS RISK OPENING UP IS A WINDOW TO NEW BANKING BUSINESS 04 07 08 A merican physicist and philos- opher Thomas Kuhn came up with idea of a "paradigm shift" in the 1960s to describe a scien- tific revolution – a momentous discovery that fundamentally rewrites the laws of science, such as Galileo proving the Earth revolves around the Sun or New ton dis- covering gravity. It is not too much to say that finance is undergoing a paradigm shift today, driv- en by smartphones, financial technology startups, and trends such as blockchain and artificial intelligence. "Most of the change in the industry was quite incremental and what I regard as linear – the introduction of ATMs, the introduction of credit cards, those kinds of things," says Antony Jenkins, former chief executive of Barclays. "When you look at what's happening now with mo- bile banking, it's a true transformation. The power in people's pockets enables them to change things in really quite a radical way." The technologica l revolution in f ina nce is at lea st ha lf a decade old. A nd yet em- bracing t his new la ndscape rema ins a Gordia n K not for most established f ina ncia l institutions. Recent P wC re - sea rch found t hat only 20 per cent of f ina nce executives feel t heir orga nisa- tion is str uctura lly ready to embrace a digita l f uture. Since leaving Barclays in 2015, Mr Jen- kins has spent time speaking to fintech startups and banking chief executives to get a sense of the gulf between the two parties and how to bridge it. He has identified four main challenges facing incumbents: the sky-high expectations of customers who are used to services such as Facebook; the weight of regulation since the financial crisis; legacy tech- nology within banks; and what he calls "cultural resistance". "If you look inside a big bank, I often think it's like cutting through a meta- phorical tree," he says of the tech prob- lem. "Banks have almost every generation of technology going back all the way to the 1960s. Those legacy technology stacks are really, really challenging." Mr Jenkins founded 10x Technologies, a startup that offers a cloud-based core banking platform – a modern operating system for finance. It aims to help banks with their digital transformation by giv- ing them new foundations on which to build a new bank. However, it's the last challenge, cul- tural resistance, that Mr Jenkins says is "the most difficult and the most power- ful" obstacle. OSCAR WILLIAMS-GRUT AREA OF DISRUPTION FROM FINTECH Financial services executives and senior managers ranked the sectors likely to be most disrupted by fi ntech over the next fi ve years PwC 2016 Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 3877 3800 or e-mail info@raconteur.net. Raconteur is a leading publisher of special-interest content and research. Its publications and articles cover a wide range of topics, including business, fi nance, sustainabil- ity, healthcare, lifestyle and technology. Raconteur special reports are published exclusively in The Times and The Sunday Times as well as online at raconteur.net. The information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher. © Raconteur Media You have to pull the tiller incredibly hard to move a big business Bridging the gulf between big banks and challengers big banks and challengers OPEN BANKING BLOCKCHAIN REGTECH FINTECH DIGITAL TRANSFORMATION UNBANKED Mr Jenkins adds: "The one piece of ad- vice I always give executives or CEOs when asked how to change the tempo around this is to spend some time understanding the underlying technology. Once you un- derstand that you'll understand how pro- found this change is going to be and that's the real driver of all this." Still, even if those at the top of organi- sations can grasp the scale of change, can they translate it into an effective strategy? DAN BARNES Award-winning business journalist, he specialises in fi nancial technology, trading and capital markets. IAN FRASER Author of Shredded: Inside RBS, The Bank That Broke Britain, he was business editor at The Sunday Times in Scotland. CLARE GASCOIGNE Formerly on the staff of the Financial Times, she is now a freelance journalist specialising in City and fi nancial features. JAMES HURLEY Enterprise editor at The Times and award-winning journalist, he was formerly enterprise editor with the Telegraph Media Group. DAVEY WINDER Award-winning journalist and author, he specialises in information security, contributing to Infosecurity magazine. OSCAR WILLIAMS-GRUT Senior reporter for Business Insider UK and fi ntech specialist, he worked for the London Evening Standard and The Independent as a stock market reporter. PUBLISHING MANAGER Misha Jessel-Kenyon DIGITAL CONTENT MANAGER Jessica McGreal DESIGN Samuele Motta Grant Chapman Kellie Jerrard PRODUCTION EDITOR Benjamin Chiou MANAGING EDITOR Peter Archer DISTRIBUTED IN PUBLISHED IN ASSOCIATION WITH RACONTEUR CONTRIBUTORS /future-of-fi nancial-services-2017 @raconteur /raconteur.net @raconteur_london DISTRIBUTION PARTNER Consumer banking Fund transfer and payments Investment/wealth management Small business banking Brokerage services Commercial banking Insurance intermediary Market operators and exchanges Fund operators Investment banking Reinsurance Property/casualty/life insurance 0% 10% 20% 30% 40% 50% 60% 70% 80% of finance executives feel their organisation is structurally ready to embrace a digital future 20%

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