Banking

Welcome to the age of the incumbent in banking and insurance

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We, in the financial services industry, are leading the charge, ushering in “the age of the incumbent.” That notion might sound counter-intuitive, given the proliferation of start-up Fintechs, who seemingly threaten established institutions at every turn. But we at IBM are not only very optimistic about incumbents, we believe the time is now for incumbents to aggressively drive disruptive innovation — to become the digital pioneers.

A major reason for our strong belief in the “age of the incumbent” pertains to data, and much of the world’s most important data resides within the enterprise incumbents we serve.  In fact, 80 percent of the world’s data resides behind firewalls, and we believe that data will the basis of competitive advantage for years to come.

Data is at the center of everything businesses do these days — how companies apply innovation and technology to that data is what creates a new level of differentiation. The more data you have, the more you can mine it for insights on how to improve the client experience, address a risk, or profit from an opportunity.  And having so much of that data locked up behind firewalls is the single most important advantage that positions incumbents to succeed, moving them from a defensive posture to going on offense.

The incumbents are also better positioned to address the complex regulatory landscape in financial services than their new start-up competitors. They have more experience, leading to deeper industry expertise and are more informed on risk and compliance.  In areas such as anti-money laundering (AML), know-your-customer (KYC), and the myriad of other potential risks and reporting requirements in the industry, incumbents have more data and experience with which to make more informed decisions about risks.

Good reasons for optimism, but…

Even as incumbents enjoy these advantages, banking and insurance executives are facing continued challenges. Digitally native competitors with lower or no fixed costs, constantly evolving digital technologies, and security and cyber-threats have all caused more than a few sleepless nights.

The answer to many of these challenges lies in better use of cloud and artificial intelligence (AI) technologies. Incumbents recognize that putting more of their workloads in the cloud, or connecting them securely to the cloud via hybrid cloud capabilities, offers them the means to unleash new possibilities with their data. Some organizations are already doing this in discrete areas of their business. But they need to do it more broadly, connecting all the value they have in their enterprise with the additional value that can be harnessed from the growing ecosystems beyond their walls.

For example, at IBM, we build solutions for things like AML, KYC and surveillance, leveraging Watson APIs, using the more than 50 underlying technologies that form our Watson Cloud Platform, to apply cognitive capabilities to the troves of data our clients maintain for solving such issues. The ability to connect that core data with new capabilities creates new opportunities for incumbents — leading to efficiencies and lower costs, or new revenue streams.

An ecosystem for growth

Looking ahead, it is likely that for businesses in the future, growth and new opportunities are going to be driven by ownership of, and contribution to, multiple cloud based platforms — using a vast ecosystem driven by the network effects of now ubiquitous, connected technology.  The partnership between IBM and Watson is a good example of the benefits clients can gain by integrating platform capabilities.

Cloud and AI technologies help to remove barriers — reducing fixed costs, accelerating time to market, and mitigating distance. Cloud-based technologies are enabling organizations to move more quickly to new areas of opportunity.

Once perceived as competitors, fintechs and insurtechs will play a role in these platforms because they provide capabilities that established incumbents may choose not to develop in house. Incumbents may be better served to get certain capabilities from the ecosystem rather than building it themselves. How organizations put the different building blocks within an ecosystem together can create the differentiation that they bring to market.

Ecosystems will be important to the battle with bad actors in the future

We’ve all seen news stories about data breaches that have damaged the reputations of well-known companies and lost the trust of their clients. In this network-of-networks of the future, security is going to require an ecosystem of partnerships to succeed.  The IBM Security X-Force Threat Intelligence Community is a good example of how we’re helping to build this ecosystem, one where all participants will benefit from shared information interrogated and informed by a cognitive, or AI based, cloud platform.

IBM is making this real through our IBM QRadar Advisor with Watson capabilities. Connecting this type of platform capabilities into other platforms will be paramount to protecting enterprises from bad actors, who themselves are now using AI based bots to introduce threats.

Blockchain: The missing piece to the ecosystem puzzle

In the coming years, Blockchain as a technology and platform may have the biggest impact of all: one for which incumbents are well positioned to take advantage of with their industry and business process expertise. Blockchain, which is a transparent, frictionless, distributed ledger, is going to drive an entirely new level of efficiency in transactions that we’ve never seen before – and Blockchain demonstrates the importance of ecosystems moving forward, and one which is inherently secure.

It creates a higher level of trust that will enable new relationships to thrive and create new ways to do business. Blockchain is an example of the new opportunities created by new platforms and ecosystems. IBM clients are using this technology for things like private equity record keeping, post trade processing, and payments, and we believe this is just the beginning.

Incumbents have never been so well positioned to go on offense – using their own data with cloud and AI technology – to make better decisions, derive new insights, and partner in new ways.  They are the new ecosystem champions, building the business architecture of the future. It is indeed the age of the incumbent.

IBM Vice President of Systems, North America

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