InsurTech/Fintech – New Ecosystems
João Paulo Matos, coordinator of the InsurTech workgroup of the Portuguese association of Fintech and InsurTech (AFIP) shares his vision for the future in the article.
Where will this unstoppable revolution called digital transformation lead us after all?
One should begin by clarifying that Insurtech Fintech has a double meaning: i) the terminology denotes innovative technology in the financial area; and ii) also designates companies using this innovative technology to change business/performance models.
‘Innovative technology’ is a dynamic, subjective concept and a target for advertising hype – just like electric cars: some run for 400 miles others only 40, but all claim to be electric. Similarly, cases of digital transformation in the financial sector range from the use of artificial intelligence, APIs, IoT, blockchain… to those who imagine that it suffices to have a website that works on PCs and smartphones. Divergences on what amounts to innovative technology will continue and increase as innovation accelerates and the digital divide between frontrunners and laggards deepens. Such a gap is likely to widen even more rapidly as the pace of disruption exceeds the capacity of legacy organisations to cope with change.
Where do startups and non-traditional players fit in?
Some may believe that only startups use ground breaking technology (e.g. geniuses in data science building predictive models). In a simplistic perspective, we would have on the one hand new InsurTechs/Fintechs– agile, embracing disruptive high potential models, mastering digital skills, with few clients and limited funding – and on the other hand old incumbents– cautious, very regulated, full of legacy skills, with steady limited profitability models, many clients, large databases (perhaps of poor quality) and substantial investment capacity. However established institutions may also be innovative and agile, particularly when the stakes are high – an anecdotal case is algorithmic trading in markets (shares, bonds, derivatives, foreign exchange): it was not the centenarian nature of incumbents that prevented these from hiring young mathematicians to make money via machine learning, whether markets go up or down. Another way for current incumbents to get their way is to acquire skills and solutions developed by tech startups – the acquisition of Maxwell Health (digital platform + mobile app + virtual ID) by Sun Life Financial illustrates this.
In addition to those two camps divided between Insurtech/Fintech and incumbents, one should also consider large technology and e-commerce companies: Alibaba, Alphabet, Amazon, Apple, Facebook, etc, which also integrate financial functions and products in their respective value chains. They are by no means short of agility, innovation, digital skills, immense customer bases, big data and muscle to invest in various markets. The boundaries between sectors, and between countries, particularly in the financial services space, are blurring – Amazon UK offers insurance policies, Amazon Protect, Apple has designed an innovative credit card, Apple Card, Facebook is thinking of a cryptocurrency to support payments and so on.
Anticipated outlooks keep evolving rapidly. The scenario was initially deemed more antagonistic: startups aiming to revolutionise existing business models versus incumbents looking at them as threats. Nowadays many traditional banks and insurers, as well as Insurtechs/Fintechs realise that collaboration may prove mutually advantageous (via partnerships, equity investments, incubators, etc.). Such collaboration often takes place in specific segments of the value chain, reinforcing the specialisation of technology and of players – for example, we can identify actors exclusively focused on health risks, such as Carrot Health, VivaMetrica. Instances of parallel competition and collaboration also occur – such as a Fintech bank competing with other banks in its own country while providing advanced credit risk forecasting services to local banks in other geographies. In Portugal, about half of InsurTechs/FinTechs aim to collaborate or provide services and software to existing banks and insurers.
Just as astronomy is not the science that deals with telescopes but rather with the universe, even if telescopes are obviously indispensable, digital transformation is not about information and communication technologies (ICTs) but rather the development ecosystems, notwithstanding ICTs being paramount. ‘Ecosystems’ refer to new economic and technological and competence systems with widespread impact across organisations old and new, employees and consumers. We are witnessing the emergence of disruptive business models such as data monetisation, innovative technological architectures such as 5G mobile, different work methodologies e.g. agile, radical competencies e.g. Artificial Intelligence, social organisations never before imagined e.g. global society.
In conclusion, the demanding InsurTech/FinTech challenge is:
- Startup wise, to recurrently translate the inexhaustible innovation potential (leveraged by ICT) into successive disruptions of ecosystems, targeting the largest possible number of users/clients (TAM = total addressable market);
- Incumbent wise, to shift management of business to continuous change mode, beginning with the transition from legacy to new ecosystems and permanently optimising diverse and interdependent impacts – in various dimensions from target segments customers, to value propositions , legal and regulatory aspects, business partnerships, multi-channel interactions, business processes and corporate organisation, portfolio management, human skill sets (including labour and contractors, i.e. worksource), technology platforms.