A new era of disruption

Innovative idea in businessperson hand concept design.

Insurance policies for $1.49? Ecosystems compound the power and scalability of innovation, and Chinese companies are showing the way.

The former chief risk officer of a major high street bank recently told me that there is no need for a technically experienced director in the boardroom. “That’s the CIO’s job,” she said, referring to the chief information officer.

There is another view. Financial institutions are exposing themselves to extraordinary risk because they lack technical literacy at the top. They lack the metrics and the concepts to understand where their technical decisions – and sometimes confusion – are leading them.

This is worrying for reasons that might be surprising. Chief among them is that non-technical goals, such as customer-centricity, are not achievable without grasping the new alliance between technology, innovation and market segmentation.

The online Chinese insurer Zhong An is a good example of a new business mindset at work, one that will haunt many executive suites in years to come. It is an exemplary case of today’s connection between technical competency and customer-centricity, the sweet spot that many financial institutions need to design for.

The relationship between customers and new technical capabilities

Zhong An began life in 2013. As China’s first internet insurance company, its growth and innovation are extraordinary. The company created 300 new products within its first three years, generating 630 million policies in year one. However, these are not necessarily what is most impressive about the company’s capability.

The average cost of a Zhong An policy is $1.49. Even accounting for cost differentials, this is extraordinarily low, given that it implies sales and settlement costs heavily trended towards zero.

Why is it so important to financial institutions grasp this?

The first answer is that Zhong An is part of a trend. It is partially owned by Alibaba and integrates with the Alipay financial system. (Tencent is another owner). It sits within an extraordinarily powerful ecosystem.

The second answer is that this rate of product innovation signals a business that is relentlessly driving towards new customer segments and new customer needs. Zhong An management and partners recognise that business needs to change because life has changed, society has changed. What consumers need is becoming vastly different from the very recent past.

Take, for example, the trend to an asset-lite economy, where people don’t own goods. That reduces the need for credit and for different types of property insurance. Zhong An feeds on that changed environment. It also addresses the challenge of grudge purchases. You cannot begrudge insurance cover at $1.49. The customer feels good in that situation.

Likewise, people who have small change in Alibaba accounts get their money invested in managed funds, earning a small return. That too feels good. Building an alliance with customers by anticipating their needs is the new game in town, and technology permits it at ultra low cost.

The non-response risk factors

Western institutions face three major problems in mustering a response to the constellation of change represented by companies like Zhong An:

  1. Chinese companies collaborate on a scale that would invite antitrust interest in the West, yet that scale of collaboration is driving extraordinary new businesses.
  2. Western companies make poor technology decisions because of internal departmental conflicts, limited capacity to understand the potential of new technology, and the lack of a board driver for coherent, competitive innovation.
  3. Our financial institutions are still trying to design and sell their products for yesterday’s markets – products that are too expensive in a way that can leave consumers feeling like losers.

A quick example: a person booking a plane from London to the United States could be dealing in three currencies (buying the ticket in dollars, travel insurance in sterling, and yet operating in euro if they are connecting from outside the U.K.). Typically, when offered the opportunity to buy insurance for the trip (at $60-70), they will spend a half hour trying to understand the insurance policy; there are so many
exclusions that it is impossible to be sure of making a claim. In the meantime, the currencies are reconciled for the passenger at a cost that is hidden.

The lack of cost transparency in FX, the lack of transparency in the policy, and the sheer cost of the overall transaction in money and time are irksome. But, more importantly, the ability to make a customer feel good is lost.

In China, the services might be provided by the same group of collaborating companies. You can book travel on Fliggy (owned by Alibaba), which offers various insurance options from Zhong An (part-owned by Alibaba), and pay through Alipay – all helping define the new Chinese lifestyle together. Cooperation within the ecosystem is allowing for very rapid responses to new customer needs.

Attitudinal and lifestyle change is more obvious in Asia, but many western attitudes are little different. In a 2016 study of Chinese and U.S. millennials, Zennon Kapron and I found more similarity than difference around money issues.

But being customer-centric is a massive puzzle for many financial institutions. Can they find the sweet spot? Technology is only half the story.

Laying influential technology myths to rest

Like all players in financial services, Zhong An is working on blockchain and artificial intelligence, yet its most important advantage is that it is born in the cloud era. A survey that we carried out with GARP in 2017 found that risk managers thought AI would bring a foundational change, but very few were adopting. The AI hype was largely driven by exemplary cases like American Express. It will prove challenging for financial institutions to develop the skills they need to bring AI models to maturity. It will happen, but it takes time.

Blockchain is even more time consuming. Though there is plenty of activity, there are still doubts about its scalability. For that, blockchain needs breakthrough thinking and new protocols.

The pent-up demand for new solutions might create breakthrough ideas, but it also means blockchain is a high-risk endeavour.

Which brings us to the cloud. Many cloud implementations in finance are hybrid, with front-end systems deployed to the cloud linking through to bank data centres.

The rule of thumb is that you need to adapt all of your applications to the virtual infrastructure in the cloud, taking them out of the data centre altogether. When you have no infrastructure to worry about, new services can scale according to need without any investment decisions to make.

What we see with companies like Zhong An is the ability to create multiple new products and test them in the market all the time, with two or more full, new-product releases a week, along with many hundreds of feature improvements.

Not having this capability is far and away the biggest risk financial institutions face.

One problem with bank cloud implementations is that they tend to be non-strategic. On the face of it, there can be few more strategic decisions to make, but pressure – from the need to innovate and multiple different vendor pitches – often creates confused, tactically diverse cloud environments that lack strategic coherence. What should be the biggest advantage of the day is compromised, and there is no board member available who understands why it happens or what the best option looks like.

Let’s now look at the risk mitigation factors.

The need for end-to-end agility

The current vogue is to address these issues through agile methods, and therefore to make it the responsibility of delivery teams rather than executives or board members. This is highly problematic.

Agile methods are defined by the historic needs of the IT department. By and large, agile methods tend to focus on delivering projects that are defined by another part of the business. Experience on a project becomes its own silo, with little in the way of critical feedback reaching back into the business as teams beaver away on delivery.

Only rarely do people in agile environments raise questions about business goals. The risk of unaccountable decision-making is therefore not addressed, nor is the need for a more empowered workforce.

This siloed, non-critical arrangement is a risk factor. But there are more.

One of the biggest critiques of agile is that while it is a way to do things faster, it is as likely to speed up poor work as it is good work. It does not differentiate.

And in agile and lean methods, value is usually defined as a reduction in waste, rather than as an investment in discovery (discovery of new needs, new success factors, new assets, new techniques).

In all these senses, agile is business as usual.

Innovation and careers

In contrast, Chinese companies force the pace of innovation through an intense internal competition to be aboard successful new projects. Rather than fear of change, it is essential to career progress. In traditional software environments, work is a handover, defined by a business group and handed to IT for execution. In companies such as Alibaba, the business is constantly challenging the IT pool to come up with novel answers and to deliver fast. Without the opportunity for those challenges, careers stall.

What also lies behind that contest is a genuine search for value. Value lies not only in reducing waste but in contributing to good outcomes for customers. In order to achieve those outcomes, the innovation process has to begin with the constant discovery of new trends and needs, and it has to continue long after delivery by incorporating customer feedback into work methods and product redesign.

In other words, the business becomes an end-to-end system for value, where companies take products to market for $1.49.

It is almost inconceivable for a western enterprise to understand value at that price point. Yet, companies that want to compete in the emerging business environment have to detach themselves from the sense of entitlement to a particular price range or margin. Instead, they need to deploy technology to drive the cost of products towards zero and to expand the range and quality of services they offer – and to do so at scale.

The ecosystem factor

That issue of scale brings us back to the ecosystem factor. We are in the age of business platforms. When we think of platforms we think of Apple and the iPhone or Google and Android, companies that are transacting billions of microtransactions a year.

The idea of microtransaction management began with eBay and PayPal and was further adapted by Apple (99-cent album tracks) and Google (micro-advertising). These systems were viable because they allied scale to low price in an environment that was also marked by low relative costs.

But the scale advantage lies with China, and we are beginning to see it play out in various industries where the commodity is virtual (money, bookings, insurance, advice, learning, health consultations, giving and so on) and at the interface of these with physical-world products (restaurants, cycle hire, travel, etc.).

Rapidly scaling up new offers in all these areas is possible because of the technical competence and market insight of the management, but the companies that develop those offers are often linked through co-ownership. The ecosystem is one of kinship.

In conclusion, this whole constellation needs to be more exposed. The advantages of Chinese companies are immense and will grow rather than diminish. The advantage of scaling companies to meet new needs is providing China’s platforms with exceptional experience built around customer wins, propelling them to a whole new philosophy of business and a complete reinterpretation of value and how to create it.