Could digitalization drive finance towards consumer and local focus?
When you, as I am, are responsible for NFU’s intelligence (i.e. monitoring the developments in the Nordic and European financial sectors) it means that you, without actually looking for it, notice that certain themes tend to pop-up no matter what direction you look in. How are consumer relations changing in finance? – it moves from branches to social media thanks to digitalization. What is one of the main challenges for insurers? – low interest rates caused by digitalization. How does the EU work to ensure that the financial sectors boost European growth? – support new financial solutions such as crowdfunding, that emerges from digitalization.
Digitalization, digitalization, digitalization… It does not only affect the financial sectors, it is actually foreseen to be the fourth industrial revolution. The digital revolution is said to mean that everything that can be digital will be digital, and that definitely includes financial services! But before we dig deeper in digitalization’s impact on finance, we need a definition of this fourth industrial revolution, and that definition is said to be two-fold:
- that information will be transformed from analogue to being digital. So it can be structured, searchable and available through digital channels;
- social digitalization arises; meaning that individuals and organisations can communicate and exchange information to each other through digital means. Simply, it has an impact on how people communicate in, and live, their lives.
I guess the first part of the definition about information could mean money – we do not need a coin anymore when we can make it digital – and the second could mean payment systems. So digitalization gives us mobile pay solutions.
But hey, why is that a revolution? We have had electronic saving accounts and money for quite a while now. Well, it is just during the later years (the first iPhone was sold in 2007) that a mass of people have got the knowledge and tools to use the digital opportunities that come with that electronic money. This is said to be the social digitalization part of the definition. For example, people have today constant access to internet, thanks to the smart-phone in their pocket, so an internet based payment system in the subway does now make sense.
These new digital opportunities for consumers and companies will have particular impact on a technology-driven sector such as finance. Personally, I believe the relationship between employees and the consumer is about to change the sectors dramatically. Interactions to consumers will keep moving to social media, I can already chat with my local bank on their Facebook site, and for the company it means that it has an active relation with an additional consumer to the marginal price of (near to) zero. Yes, it did cost some money to put the Facebook side online and there is a paid employee that answers my questions. But it is much cheaper to engage with new customers on Facebook comparing to setting up another branch office to attract customers.
- (An interesting side note to this is that production costs for most industries diminishes due to digitalization. Take newspapers as an example; one additional subscriber requires one additional newspaper (on paper) that will costs some to produce and distribute. Compare that to one additional subscriber to a digital newspaper, it will not cost anything to let another subscriber enjoy the digital newspaper. But not only does production costs decrease thanks to digitalization, increased competition and the possibilities to compare prices on the Internet leads to further pressure on prices. So the inflation goes down, and as a consequence the central banks decrease the interest rates. And we all know that low interest rates have a negative impact on the financial industries.)
Anyhow, through being active on Facebook the company has entered a new, and global, market. A market that of course also includes the consumers you would like to reach through establishing a new branch office. The most revolutionary fact is that it makes it possible for new actors, which might see financial services as something else compared to the traditional actors. I mean of course companies that are coming from the digital era, that are used to analyze consumers from their behavior on digital platforms and to communicate to them in a modern way. Google has for example already announced that they are planning to engage in the insurance sector.
As an example, imagine if there is a digital solution to value the belongings in your house, combine it with Google Maps and Google Analytics and Google knows where you live and what behavior/risk profile you have – then Google has the information necessary for giving you a household insurance and set an individual price for it. And let’s say they have a partnership with a Japanese insurance company, advertised on your Gmail, and it could be quite a competitor for Nordic insurers.
As you understand, those companies do not need to have a branch or office in the country they operate in, but simple access to the World Wide Web and a global market such as Facebook. Especially when focusing on young consumers that are as, or more, comfortable with digital meetings than face-to-face ones. Does it sound unbelievable? Well, if you bet on football games every now and then by visiting an international company’s website, why should that not work for trading with shares, as another example? E-commerce rose between 2005-2013 from 3 to 12 percent of the global merchandise trade, and it is still growing. In India, insurance sales on digital platforms are said to grow to 50% for life insurers, and 75% for non-life insurers, by 2020 – from today’s number between 10-15 percent – that is only five years from now! These digital opportunities may give global digital giants an advantage, both thanks to their strong trademark, knowledge about digital opportunities, and not least because they operates with low production costs – thanks to their digital approach on consumer relations.
So the Nordic financial sectors will face new opportunities and stronger competition, but how will they handle it then? I will enter the thin ice now and try to give my informal title – responsible for NFU’s intelligence – some justice… Here are some suggestions after having looked in the crystal ball:
- Innovation will be the companies’ first priority. The digitalization trend has just begun, and mobile pay solutions are only the start. If you cannot compete, for example by going into partnership with innovative FinTech entrepreneurs, you can lose market shares. Just as Ericsson and Nokia have done in the mobile phone market when they did not adapt to the smartphone revolution in time.
- Trust and consumer focus will be at the forefront of all business models. And the ones that cannot rebuild trust and give consumers added value will lose, because competing with strong trademarks like Google will require loyal customers and strategies to attract young consumers.
- Glocalized finance. Increased pressure from globalization – driven by digital opportunities – is said to make products change to meet the needs of local consumers. So as a consequence of global competition, companies’ business models need to take local concerns into account, in order to compete with global giants. Could this be a re-boost to decentralized and local focus in business models by Nordic financial companies, a development currently pursued by, for example, Handelsbanken?
On this last point, the established financial sector has a competitive advantage. Its social capital – namely the employees – who know their local clients, and who are experts in risk assessments, advice, and much more. And employees will be crucial not least in order to build trust between the company and the consumers in face-to-face meetings, or by being the competent voice behind the companies’ chat-profile when advising consumers online. Of course, much of this must be complemented by new digital solutions to meet demands from a generation raised in a digital era, but it is still true that the social capital of companies is key to compete today and in the future.
So in the end, digitalization could be a re-boost for stronger consumer and local focus in finance, where employees must be put at the center of companies’ strategies in order for them to stay competitive.
Martin Hassel, Policy Officer