South African financial institutions should reconsider their adverse attitude towards risk, as this would improve their ability to innovate, a panel of global partners from the Boston Consulting Group's financial services and insurance practices told a recent Gordon Institute of Business Science (GIBS) forum.The increasing digitisation of the industry offers an opportunity for improved efficiency and deeper understanding of customers through micro segmentation.
Senior Partner,BCG Johannesburg ,Adam Ikdal said by transforming their organisations from traditional hierarchies with deep silos to ones that encourage collaboration, financial services companies could enable decision-making at all levels and encourage an appetite for risk.
Davide Corradi, BCG senior partner in Milan said South African financial services stood apart from other emerging market economies, and are as sophisticated as those found in Europe or the United states. However, he argued that digital required a different culture, one that embraces risk-taking and innovation. The shift would require new incentives that don't undermine the possibility to innovate. He discussed three macro trends currently transforming global insurance and financial services:
Corradi said the rate of disruption in financial services "is lower than it could be if it wasn't for a tsunami of regulations." The continuous introduction of new regulation was causing the industry to lag behind others in terms of innovation. This protection of the industry was deterring new entrants from banking and insurance: "New entrants simply cannot cope with the rules of the game," he said.
While the intention of regulation to protect consumers and safeguard capital was positive, Corradi said over time the reserves needed to comply with rules have become onerous, and require substantial investments in areas such as IT, capability and processes. These mandatory investments results in increased costs and directs capital away from advancing innovation or customer service. "Smaller players aren't able to afford these investments and can't compete."
Euvin Naidoo, a BCG partner in Johannesburg, called regulation a double edged sword as the protection of customers meant an added layer of cost. There is a need to simultaneously protect customers, while encouraging innovation, especially in the South African context, Ikdal explained. He said financial incentives would encourage solutions to the lack of financial inclusion and insufficient insurance coverage found in the country.
Power to the consumer
The ability to gain information from varied and diverse sources has resulted in a shift in power towards consumers. The wealth of information available on the Internet, customer relationship management, smart analytics and consumers' ability to switch service providers has "placed pressure on financial services dinosaurs who can't innovate," Corradi said. In such an environment, digital culture, speed and orientation to service are non-negotiable: "Customer centricity can be a big opportunity for insurers if they reinvent themselves," he added.
The rise of digital
Corradi said the short-term outlook for the financial services industry would involve an ongoing shift from product to services, and an increased digitisation of core business. This would include the possibility of change in the way business engages with customers and had far reaching consequences for cost and customer experience. This would require financial services and insurance companies to rethink customer experience and manage data strategically as an evolutionary change towards digitisation.
Advanced analytics allow for increased customer understanding and micro segmentation. For example, the hybrid customer segment, who are more affluent and loyal in terms of value and volume when well-served, prefer to research financial services products online, but buy offline. "Therefore linking the different channels is important, as is guiding customers along the path you want them to take," Corradi said. Building new engagement models, such as mobile, and integrating ecosystems to do away with vertical integration are among the more disruptive changes the industry can expect according to Corradi.
Michael Urban, BCG partner in Dusseldorf, said customer engagement and interaction would continue to become increasingly digitised. The overall customer experience across channels has to be coherent and the use of Omni channels would go a long way to achieving this goal. However, he cautioned that while financial services and insurance players often want to engage customers through all available digital channels, a better strategy would be to focus on the few that are important to customers, thus tailoring their services according to client needs.
The keys to successful digitisation of the core are collaboration with experts to overcome silos for true innovation, communicating broadly and a focus on enablement. All of this fundamentally requires a shift in business models and cultures.