Engage 2016 Preview: Bracing for the Digerati

Gartner’s Dale Kutnick, who will be speaking at Engage 2016, discusses how digital disruption in financial services will challenge traditional business and economic models.

This year at Eagle Investment Systems’ Engage 2016 client conference, the prospect of digital disruption will be a prominent theme for many attendees. Gartner Senior Vice President, Emeritus, and Distinguished Analyst Dale Kutnick, who will be presenting at the three-day event in November, spoke to Eagle ahead of Engage to highlight some of the key issues facing financial services companies as they prepare for the coming digital wave.

Eagle: We’ve witnessed growing interest in financial services from many of the largest and most well known tech and software companies, such as Google, Amazon, Alibaba, and others. Why should the incumbent operators in the sector view these companies and the growing pool of fintech startups as a potential threat?

Kutnick: The advance of the “digerati” into financial services hasn’t yet been all that pronounced, but we think that will soon change. If you look at how they’ve already altered the landscape in the payment-systems space — all in a relatively short period of time — you can get a real sense of the threat that these tech companies will pose to existing business models.

But, I don’t think you’re going to see a situation in which a disruptive technology puts everyone out of business. The bigger players are already adapting. Fidelity and Schwab, for instance, have introduced their own robo-advisory offerings to compete with Betterment, Wealthfront and all of the other automated wealth-management platforms.

In terms of preparing for the threat, there’s a big focus on becoming more agile. Among the bigger banks, as their back- and middle-office functions become automated, you’ll see innovation translate into far more streamlined and efficient operations.

What are the disruptive technologies that we could see in the next five years and how will the incumbents be affected?

Kutnick: There are a couple things in particular that will have an impact and already have. You’re going to see smarter machines that can make decisions. This can take the form of the robo-advisors setting individualized asset allocations or it could be more sophisticated applications of factor-driven investing, such the smart beta strategies that have emerged over the past few years. In terms of the next big breakthrough, though, that can be difficult to identify until it actually happens.  Much depends on the regulatory environment in different countries.  But I do expect that the “smart bots,” like Amazon’s Echo, and derivatives of Apple’s Siri, Google Home, etc., as well as smarter algorithms will be a part of it.

The biggest threat to the banks and traditional financial services companies will likely be the agility of the new entrants and their ability to move far more quickly to address new market needs. The new entrants will also benefit from a lower cost per transaction because they don’t have to carry the substantial infrastructure of legacy systems required to support the traditional banking model.

All of the existing banks, for instance, have built up these very robust systems, and the entire platform may be underpinned by or connected to legacy technologies that are 10 or even 20 years old. The newer guys can come in and — without the drag of outdated technology — handle a greater volume and variance of transactions. They can also address the heightened security requirements of consumers and using the scalability of the cloud, can better accommodate data volumes as they continue to grow.

The use of outdated legacy technology is really a soft spot for so many incumbent firms today; so much so that when the digerati do identify and target a specific niche, it could put existing providers at a material disadvantage.

Eagle: What are some of the unknown unknowns that organizations should be thinking about in the years ahead?

Kutnick: Very quickly I think you’ll see that machines will become a lot more intelligent and capable. Over the next five years, things like machine learning and natural-language processing will have a dramatic impact on the industry’s ability to scale their services and accommodate a wider breadth of financial transactions. Some of the biggest breakthroughs will come from the ability of machines to replace human beings in traditional banking environments, whether it’s analysis and oversight or even interacting with customers. The move to automation and semi-autonomous capabilities will be a theme that continues to play out.

While the immediate threat is on the periphery of a bank’s traditional offering – and largely focused on the less-regulated functions within financial services — the front office realizes that competition is lurking around every corner. The incumbents that thrive in this new landscape will be those that are most agile and can move just as quickly as the newer entrants to the industry.

Dale Kutnick is a senior vice president, emeritus, and distinguished analyst at Gartner, where he focuses on IT management. Dale’s primary responsibilities are working with CIOs and senior business leaders to help them better manage and exploit technology and information to drive business transformation and enablement. From 2007 to 2013, he was global leader of Gartner’s Executive Programs. At Engage, Dale’s presentation will explore how digital technologies will challenge traditional business and economic models. To learn more about the presentation or the other speakers featured at Engage, click here.

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