In a similar fashion to how Walmart disrupted "Main Street" and how Amazon disrupted Walmart, the finance and insurance industries are ready for a new wave of disruption. This disruption may occur from within the industry itself or from outside players. Disruption will not be led by a single source, like a superior supply chain or web platform, but rather from innovations that improve core business processes, build efficiencies for the front and back offices, and improve the customer experience.
Blockchain: When considering the upcoming disruptive technologies, Blockchain represents the greatest uncertainty. Blockchain is the most unique in that it encompasses both a process innovation and a product innovation. Potential benefits in finance and insurance have been identified and are well known, but its costs are unidentified. Beyond technological investment, which topped over $2 billion in 2017, costs include opportunity costs of lost computing power, slow transaction time, and an unregulated environment. The unregulated environment poses the largest risk as Blockchain markets can be victim to bad actors like Oncecoin, which was later revealed as a Ponzi Scheme.
There are certainly risks associated with Blockchain, but the potential benefits overshadow costs. These benefits include secure/transparent/low cost transactions, decentralized banking, and immutable history of transactions. In other words, there are vast improvements for financial institutions in a homogeneous market that also benefit the customer. Optimism about the benefits versus the costs can be quantified by initial coin offerings which increased from $21 million in Q3 2016 to $1.3 billion in Q3 2017.
Future outlook: With an exponential investment rate in currency and large investment in underlying technology, Blockchain technology will likely move forward, despite uncertainty. Amplifying Blockchain's prospects, more than 24 countries are investing in Blockchain technology and 90 others are in discussions regarding its application. Blockchain's future is further secured by the fact that it is agnostic of the company size; both large and small firms can build and benefit from Blockchain. Blockchain will move forward whether it be by its own merit or the sunken-cost fallacy.
Blockchain in use: (beyond cryptocurrency) include IBM's Hyperledger, Ethereum, R3, and in-house blockchains like JP Morgan's Quorum.
Artificial Intelligence is the goliath of technologies on the horizon when considering both investment and application. According to McKinsey, overall investment in 2016 was between $26 billion and $39 billion by non-government entities. Financial services was behind only Technology and Telecommunications in AI use with 28% of firms adopting AI technology. Opportunities for AI technology within the finance and insurance industries include fraud detection, call center support via conversational interfaces, complemental tasks, automation of repetitive tasks (e.g. regulatory reporting, and procurement/accounting tasks), and eventually advanced predictive analytics for forecasting and quoting. These applications are substantial enough that some believe AI is integral to the fourth industrial revolution.
While applications for AI are diverse and plentiful, they also come with challenges. These challenges include regulatory restrictions on data collection, competing interests within firms, and data interpretation/maintenance/uniformity. Additionally, while AI start-ups are prevalent, successful AI needs to leverage large quantities of data which favors large institutions with access to it; this may also give the opportunity for Tech giants to enter finance or insurance by leveraging their extensive user data (i.e. think Amazon quoting car insurance using new attributes based on customer purchasing history).
Future outlook: Machine Learning is prevalent across the finance and insurance industries and used to automate various tasks. AI will expand upon this automation and will become increasingly prevalent.
AI in use: Machine Learning for automation is used in some capacity across large financial and insurance companies. AI use and investment skews towards larger firms like JP Morgan, Citi, Wells Fargo, Deutsche Bank, and UBS.
Cloud Computing: Cloud Computing is an example of initial caution ebbing to risk mitigation and implementation. Similar to Blockchain and AI technologies, cloud implementation was hindered by potential security risks. These security risks were ubiquitous, both from internal and external sources, and therefore, impacted both public and private clouds. Finance and insurance firms enhanced their cybersecurity to accommodate cloud technology. During the present, most firms are in some place of transition to the cloud.
As cloud technology and security have matured, the unknowns from a risk standpoint have decreased, and the benefits have become more apparent. These benefits include cost effectiveness, flexibility, and increased collaboration. Public and hybrid can even enhance these benefits and provide companies with elastic computing.
Future and current outlook: According to Forbes, hybrid cloud adoption grew by 3x from 2016-2017, and 82% of insurance companies and 74% of financial companies had either public or hybrid cloud solutions. Moving forward, Forbes also found that most IT budgets will be dedicated towards cloud projects and solutions. Given the large resource allocation to cloud, both public or hybrid, and current implementation, cloud has an optimistic future in finance and insurance and will be paramount to any firm's success.
Cloud in use: Most large finance and insurance firms have transitioned to a hybrid cloud on some level. Transition to a full public cloud may vary on a company to company basis.
From a product and process standpoint, these technologies have and will have a profound impact on the finance and insurance industries. Existing finance and insurance companies will have to decide whether to be a risk exposed trail blazer or a cautious onlooker at risk of being left behind.
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