Uberization is upon us, as digital disruption continues to impact practically every sector, industry, and geography. Uber did it with the taxi business. AirBnB did it with the hotel business. And banking is no different, with companies like LeaseQ and OnDeck changing the way business customers, especially small businesses, think of financing relationships.
The change does not stop there. Personal banking customers are increasingly opting for automated or digital-access points to do their transactions anywhere, anytime, and anyway they want. For an industry as traditional as banking, this kind of disruption is causing a shake-up that is having a knock-on effect on global sourcing. It is a crisis — and an opportunity.
An Unsurprising Uberization
Dr. Anthony Miles, CEO and founder of Miles Development Industries Corporation and author in the field of entrepreneurship, said that the Uberization of the banking industry is not a surprise. It is just the latest casualty of disruptive technology. “We have witnessed the decline of banking jobs over the last two decades,” said Miles.
Large banks, including Barclays, Deutsche Bank, and others, have reported a number of job cuts recently. In fact, according to the Financial Times, big banks in the U.S and Europe announced almost 100,000 job cuts in 2015 — and the trend is likely to continue. Reports have also indicated that millennials are shying away from careers in finance.
Banking, Miles said, is based on a key resource: data and information. “All industries worldwide are at the mercy of creative destruction or digital disruption,” he said. “This will in turn affect global sourcing and other ecosystems based on industries influenced by creative destruction.”
The problem is that these large institutions are often not agile enough to quickly adapt to the changes. Vernon Tirey, CEO of fintech startup LeaseQ, is one of the disruptors challenging the banking sector with new offerings that make access to business finance easier.
Changing Needs, Changing Models
He says that large businesses performed very well in 2015. “The cost of money was low, most companies kept a lot of cash in reserve and the stock market served as proof with one of the biggest runs in history,” he said. In his view, cash flow, buying and borrowing money were non-issues.
LeaseQ, though, has its sights set on the small-business sector and its financing needs. “One of the smart things small businesses are doing is renting equipment,” said Tirey. “And small businesses, especially those led by millennials, will be the drivers of finance ‘Uberization’ in 2016.”
He said that the crux of the Uberization of finance is a mentality that says, “it’s a hassle to own things,” driven by millennial entrepreneurs that care less about stuff and more about the customer. Both LeaseQ and OnDeck have focused on helping small business owners who don’t qualify for traditional bank loans attain financing.
Tirey explained that the second disruptive driver is a wave of automation that is just now reaching the outskirts of the finance industry, in sectors like equipment financing. “New-found automation, in the right hands, will mean new types of finance companies that cater to renting and leasing vs. buying and borrowing,” he said.
Opportunities for Nearshore
These changes, while challenging for both banks and providers, also offer opportunities. K. Alexander Ashe, CEO and founder of SpendPro, said that many financial services companies have offshored noncritical operations like procurement, but innovations in fintech and realization of cost savings from outsourcing may have companies looking for new opportunities to reduce costs.
He predicts that the next areas ripe for innovation include cost reductions associated with more critical operations — those focused on the front office rather than the back office. This, he said, will include reducing the branch footprint, something that is already happening in both the U.S and in Europe, as well as marketing new products/services and managing the customer experience. “The expectation will be fewer branches, fewer in-branch employees, increased automation, and more remote operations,” he said.
Ashe said that some of the automation would come from innovations with “robo-callers” and smart algorithms to walk customers through selecting and using products or services ranging from banking to investing.
Raj Saxena, senior vice president at CAST, which specializes in software analytics and measurement for clients such as Wells Fargo, Credit Suisse and Citi, believes that all disruptive technology, whether it is alternative-payment mechanisms like Bitcoin or intelligent ATMs, is creating a lot of work for the traditional IT departments in the banking industry, specifically the application-development teams.
He said that, with so many new devices to integrate and more apps/interfaces to write, the workload only continues to increase. Saxena, who was previously VP at IBM Global Business Services, has experience setting up delivery centers in Latin America — as well as China and India — and believes this disruptive push in the banking sector could result inmore opportunities for nearshore companies.
“More enhancements to core systems have to be made as well as a stronger push to re-architect or replace existing software platforms,” said Saxena. “From a sourcing standpoint, in application development and maintenance [ADM] in particular, this translates to a lot more ADM work.”
The result is more opportunities to go nearshore at a lower cost. It also offers Latin American operators the chance to write some of the smaller apps that require same-time-zone interaction in Agile development mode.
Bringing Agility to the Banking Equation
For Saxena, “two speed IT” is also a big part of this. Banks are looking at vendor strategy to address their legacy and modern application portfolios. They are looking at their internal IT shops or select vendors to establish a modern development shop that can compete with the new players. Companies are looking to rapidly deploy projects in the way Facebook does so that they can get to a continuous integration and continuous delivery environment in 2016.
With little time to develop this internally and make the needed cultural changes, banks will increasingly look to partners who can help them create solutions that can be deployed.
As has been heard from many in the industry in the last year, Saxena emphasized that the bottom line for nearshore is to not compete on cost but on overall value. “This is the reason that most large SIs have invested in nearshore in North America and in Europe,” he said.
For nearshore operations, there is an opportunity to leapfrog traditional ADM by moving directly into disruptive technologies and ADM models. “A focus on quality, productivity, and outcome-based services levels the playing field,” said Saxena.