Fintech is a Development Opportunity for High Potentials in Financial Services

Fintech is a Development Opportunity for High Potentials in Financial Services

What does the development of high-potential Financial Services employees have to do with Fintech? Possibly, quite a lot. 40-something executives climbing the corporate ladder, or anyone mentoring such a person, or anyone concerned with developing future leaders in financial services – this blog is for you. You have an opportunity to differentiate yourself if you act now.

There is significant energy and investment happening outside of the four walls of financial services companies. The question many incumbents are asking is, “How do we best engage with the new, external innovation ecosystem?” Catherine Stagg-Macey @Staggmacey and I just released a report that outlines a framework for leveraging this emerging business approach (Making the Most of the Innovation Ecosystem: Adapting to the New Insurtech World). The report includes insights from more than a dozen interviews with a range of players in the innovation system including internal company venture capital staff, independent venture capital employees, innovation service providers, system integrators, accelerator, and innovation lab leaders. A central conclusion is that the new innovation ecosystem will eventually mature into a form where financial services firms and startups coexist and regularly form partnerships to improve specific parts of the value chain. A few new entrants may find success as disruptors, but the predominant model will be a mix of joint ventures, partial ownership, and outright purchase of emerging technology firms by incumbents.   

This is very different from the traditional buyer-supplier relationship that financial services companies usually enter into with technology companies. The feedback we received from innovation participants is that differences in culture, process, the speed of decisions (or lack thereof), risk tolerance, and goals must be deliberately managed in order to get the most out of these partnerships.

Leadership experience on “both sides of the fence” – both in the startup and the financial services worlds – will be a differentiator. The candidate with a financial servcies background who can demonstrate an understanding of the challenges in bringing both of these very different worlds together will be very valuable. Those actively managing personal development plans in banks, insurance companies, and capital market firms are encouraged to:

  • Mentor startups though a technology accelerator that is focused on financial services; StartupBootcamp @Sbootcamp, Global Insurance Accelerator @InsuranceAccel, and Plug and Play @PlugandPlayTC are examples
  • Attend technology “meet ups” in your local area to learn about startups in your area and network your way into the community
  • Offer your services as a sounding board for new tech companies, either informally as subject matter expert or more formally as a board member
  • Communicate with your mentor and your H.R. career development resources about your goal to develop the necessary skills to effectively act as a “go-between”

The realization that such a role is valued is just beginning to emerge, so those acting now will be slightly ahead of the curve and well-positioned to step into critical leadership positions.

In Insurtech, Partnership Will Override Disruption

In Insurtech, Partnership Will Override Disruption

There is much discussion in the press and at conferences about insurance incumbents and the disruption that is coming their way. A close examination of what is actually going on reveals that what is being labelled disruption is actually partnership.

Complicating a meaningful discussion about what is happening is clarity around what is meant by the word “disruption”. The term is used so often that it now carries a range of meanings. On one hand, it refers to a specific market phenomenon defined by Clayton Christenson’s theory of Creative Disruption. On the other end of the scale it represents a recognition that technology is changing the industry.

In most articles and presentations the term is not explicitly defined. Many times disruption is used in the context that portends doom for insurers and that predicts that the revolutionary shifts will cause insurers to go the way of the photo film industry or pre-digital music firms. This is a compelling argument given the challenges incumbents face because of the burden of their legacy systems, their aversion to failure, and a habit of extended decision cycles.

However, there are several significant barriers for newcomers to address if they are to displace incumbents. Celent’s analysis of what has happened to date in Insurtech concludes that the need to overcome these challenges results in a model of cooperation rather than destruction.

First, capital considerations must be taken into account. This is not the capital required to build a technology solution. Agreed, it is no small feat to fund the activities required to build, test, pilot, launch, and sustain a technology solution. However, this pales in comparison to the amount of capital required to underwrite risk (pay claims and hold necessary reserves). To date, a few startups have overcome this challenge by securing relationships with primary insurers or reinsurers, but if this is the approach, it is cooperation, not disruption.

A second barrier is regulatory expertise. This is not only a knowledge of regulation, but the ability to account for regulatory requirements from the earliest stages of ideation, through design, to sustained maintenance.  For startups, detailed regulatory experience can be bought, but this is an additional capital expense. It also can be sourced from a partner, but obtaining this assistance is not likely if the startup is a “disruptor”.

Finally, there is the biggest barrier – customers. As examples of this challenge, startups in the P&C and Life space that have been around since 2010 to 2012 have failed to achieve significant scale. In insurance, attracting and retaining customers is much more expensive (there is that capital problem again) and more difficult than in consumer goods.

The inherent challenges faced by both “tribes” argue for a partnership, rather than a replacement, solution. Insurers can address their legacy technology, risk aversion, and decision challenges by working more closely with the new technology firms that actively seek risk and have a bias to action. Startups need risk and regulatory capital and expertise as well as a customer base to serve.

Partnerships between insurers and startups are a new business model. Unlike supplier-buyer relationships of the past, where a contract is negotiated through an extended procurement process, these partnerships must be governed by a common vision and controlled through active communication from both sides. Celent’s research into the best practice in these partnerships emphasizes the importance of adjustments on both “sides” of such relationships. (see report Accelerating Insurance Transformation: The Good, the Bad, and the Ugly of Innovation Relationships).

It will take time to work out the best ways to accomplish this new model, but the barriers faced by both sides will force each to adjust. Economics will drive transformation to occur in a collaborative manner. Success will come to those insurers and startups which are able to make the necessary adjustments to their own preferences, cultures, and working models to create meaningful partnerships.

The predominant Insurtech approach will be one in which startups coexist with, not replace, insurers.