Prisma Reports (PR): 10 years have passed since the 2008 global economic crisis, and the subsequent regulation tsunami, and anti-tax evasion crusade by the US/OECD. The prevailing paradigms have been changed. How has the industry reinvented itself since, and how is the Swiss banking ecosystem changing?
Marcel Stalder (MS): The starting point of the 4th industrial revolution was in 2005 - the year before the first iPhone hit the market, which was an important symbol of digitalization. 2005 was also the year before the financial crisis started in the fall of 2006. Three critical things have changed since 2005.
1/ First is the marketplace: if we look at the market in 2005, Banks, Retainer, Insurance Companies all had presence in villages and suburbs because market places were local and physical. You had a micro bank and a smaller local player in every village because the market was physical and local. In the future, markets will be platform based, and players like Amazon, Alibaba, etc, have entered the arena with a huge impact.
2/ The second big change is in the business model: business models used to be completely product driven, insurance companies were selling insurance products. In the future those insurance companies will be client-service oriented and driven. IFor example, in 2005, insurance companies had a small branch or agency in local villages and headquarters somewhere else. Nowadays, insurance companies have become much more client focused. If we look at Mobiliar, for example, a typical Swiss insurance company which is on its way towards the new reality is now becoming more platform-focused. Providers have started to offer real estate and cars because on a Saturday morning you don’t think about your insurance but about owning a flat in the mountains. These companies are trying to help customers reach their dreams and sell you that flat in the mountains in advance. They know that through your IP number, you will now need insurance as well as help with the move. In the past, local agencies sold products, in the future, this platform based client-centric delivery will take over. If you want to move into a new house, they will offer you the house insurance coverage, removal–everything. It is an entire ecosystem that they offer.
3/ The third change is that the competition used to be Brand based. In the future competition will be ecosystem-based. For example, in the airline industries, in the old days it was Lufthansa vs Swiss Air, today it is One World against Star Alliance.
(PR): What kind of future do you predict for the financial and banking industry?
(MS): Today, entire ecosystems compete against each other. The local market becomes a global platform, the product-based business model becomes a client service centric business model; and competition turns from brand base to an ecosystem-based form of competition. In such an environment, companies and banks need to do five things. Firstly, companies and banks must rethink their strategy to be successful in this client centric ecosystem environment, taking into account the critical success factors. For insurance companies, the critical success factors used to be proximity to clients and claims management. In the future, the critical success factor will be the quality of the platform and ecosystem, as well as data management.
Secondly, companies must reorganize their operational models–which we already see a lot of in the banking industry. The digital future shows shrinking margins across every industry. Companies need to increase automation, robotization, digitalization and significantly decrease costs. Outsourcing, standardizing and offshoring aspects will be key to cut these costs.
Thirdly, companies need to transform/reorganize their support functions. In 2005, there were a lot of support functions that were isolated from one another. The CFO conducted finance, the Chief Risk Officer conducted risk, the Capital management function also did its job. The future will revolve around an integrated finance risk capital management system, because the digital future will not be in silos; it will be integrated. Companies will have to outsource a lot of those activities for cost reasons, again.
Fourthly, reorganizing IT and data management is becoming an absolute must. We have seen a significant increase in data volume. In 20 years from now, we will look back on data today and joke about how it was a nice period without too much data! The future is the internet of things. The volume of data will increase so much that no company will be able to host their data on corporate servers so they must all go to the cloud. In order to manage all this data on the cloud, they will need artificial intelligence. Once the data is on the cloud, the question is how to drive the digital value of the company from that data. In that new context, companies will have to consider how they can make money with data. Banks are the prime example as strong cost-cutters, however, there will come a point where there are no more costs left to cut. Given the Fintech industry’s attack of the value chain, the margins will continue to shrink. The only solution left is to monetize data. Banks will ask which data they must collect, how to bring their data together, and who is interested in data as a means to sell it. Companies will be able to create value with the data from banks. Consequently, banks will have a digital margin or surplus to survive. As of yet, we have not seen as many data solutions in this space, but it is clearly the next step.
And last but not least, in this fundamental transformation, we will need to ensure that the workforce accompanies the company in the journey. Then we talk about culture – and I say today, this is maybe the most important part of the whole transformation process. If we cannot explain to people the purpose behind the change, the whole thing is only paper and not a strategy. Having the best talents and having them engaged, in a diverse group and with the energy and motivation to innovate and to connect – in their teams but also to clients – will make the difference between a good and a great company.
(PR): What role will Switzerland play in that evolution, will it be a pioneer or a follower?
(MS): Switzerland is one of the significant financial places, and a market leader in innovation. The challenge that Switzerland faces is that it does not have a lot of venture capital; there is a lot of capital in the system, but it does not follow innovation. We need to keep our top ranking innovation and top-notch universities, but we also need to increase a venture capital financing innovation to ensure that innovation is not going to Silicon Valley or Tel Aviv because there is more venture capital and industry there.
We also must attract innovation from outside Switzerland, and create an environment where skilled people wish to move to. If we get this right, we will be a breeding ground for the future of banking and insurance. We already see the first examples: the insurance industry already created the B3i, one of the largest global blockchain operations in the insurance industry–hosted in Switzerland. Such kinds of new developments could bring us into a leading position in the banking industry for the future of banking. Our ambition is to be a global innovation leader in the era of digitalization.
(PR): How does Switzerland stand out in fintech? How competitive and innovative is this industry?
(MS): There are thousands of fintech players globally but only a few will really grow, and only some will really disrupt. I think the future is a combination of banking brands and fintechs collaborating in an ecosystem. The trust that we need in the financial services industry comes from brands like UBS and Credit Suisse. On the other hand, the speed of innovation that comes from startups leads customers to request a combination of the two. So the future will be a combination of strong brands and startup innovation. We must have openness on both sides to join forces, and enough innovation around fintech as well as capital finance; in addition to a strong enough global attraction and marketing so Switzerland becomes a top choice for fintech companies.
(PR): How would you rate the pace of digitalization in Switzerland? What role does EY play there?
(MW): Switzerland was not a first mover in terms of digitalisation, In places like Berlin, Tel Aviv, Silicon Valley and Singapore the train had already left the station quite a while ago. Nonetheless, that is our nature: once we get our acts together, we move quickly. We are a small enough country, known for our quality, we start late but once we start we do things fundamentally right.
A lot has happened since then; driven a lot by universities, which have created great insights, great innovation and great networks around robotics and other things. We have global players like Novartis, Roche and Nestlé present here, who have enough resources to drive corporate innovation. The digitalswitzerland initiative was also launched few years ago with the aim to create an ecosystem bringing industry verticals together to accelerate development. This initiative, combined with the traction from big corporation and Swiss universities will turn Switzerland into a digital leader.
EY has played a key role as pioneer in the digitlisation of Switzerland. EY was a founding member of digitalswitzerland and the first professional services firm that introduced blockchain and cryptocurrency as a financial system in our finance department. We do not believe in crypto per se, but we wanted to experience blockchain technology ourselves before we consult our customers. EY is about to invest US$1 billion globally into new technology. We are already among the top global companies in blockchain– not many people know that.
(PR): Switzerland is topping indexes in terms of innovation, competitiveness, talent attraction, etc. What are the key fundamentals for the country to preserve its innovation and competitiveness ?
(MS): Our fundamentals are the Swiss values including social stability, political stability, having a stable currency, having a low rate of criminalization and of course, having a great work-life environment. Quality of life in Switzerland is outstanding and those values will be a significant driver for success in the future because they contribute to attract talent who like to live in Switzerland.
The quality of our education, particularly the EPFL and ETH, is also fundamental. The innovation power we have as such a small country is impressive. The ecosystem between the talent being produced and the stability that it provides, as well as the career options within global players is a critical success factor.
(PR): How is EY helping Switzerland embrace all these new trends?
(MS): Our global purpose is to build a better working world. It is not just a phrase; it is something we live up to. In Switzerland we have contributed to found digitalswitzerland; we invest in the ”Europaforum” an organization that wants to make a difference in the relationship between Switzerland and Europe – a crucial factor for business, science and society; we have a program called the Entrepreneur of the Year which is the largest entrepreneur format globally that actively supports SME and Entrepreneurship. There are many other initiatives like that which boost entrepreneurship, digitalization and political discussion and impulses.
Furthermore we invest in talent. We have an important function in educating people. Every year, we hire a few hundred talented individuals from universities that we train and bring up. Given that we are a pyramid industry, many of these individuals then go back into the industry as educated, trained people which is a significant contribution. We also invest a lot of money in lecturing at universities, in sharing knowledge, in conducting studies, and we are a significant player in the ecosystem and a good corporate player.
(PR): The world is going through a phase of uncertainty, with Brexit, raising protectionism, threatening trade wars with China, the global warming threat, etc. Where does Switzerland stand out in the middle of such turmoil?
(MS): Switzerland is geopolitically relatively unimportant, but we are economically important. As a neutral place, famous for quality and independence, we are known as the central bank of trust but also as the place where the US, China and others can meet to negotiate. Hundreds of international associations and organizations have chosen Switzerland as host country for that reason. We are economically powerful and neutral, However, as a small country in the middle of a dynamic and very diverse continent without any raw materials, we need to make sure that we keep up innovating, that our education system stays on top, that we further strengthen our international relationships especially within Europe and that we live a mindset of openness and creativity – politically, economically and on a personal level. Because innovation, extraordinary people and smart political strategy of international relations made us strong and will keep us strong also in the future.
(PR): What is your outlook for 2019?
(MS): We are still in the middle of this digital transformation and the world is becoming more and more complex. If we look back at history, the Cold War was not pleasant but it was easy to understand. Today we are in a geopolitically complex world that is difficult to predict and understand. Today globalization overlaps geopolitical development, demographic challenges, and migration. As a reaction to all this we see a new wave of protectionism on the rise; As our world is more and more connected changes for everyone for a better live increase – this is great but will also challenge our society, our environment and the political stability. Therefore, in my opinion, the actual nationalism comes mainly out of the fear of losing identity as our world gets more and more mixed up, globalized and complex. And ultimately, volatility, uncertainty, and complexity will all increase; we will also see some pockets of ambiguity.
In spite of this, the global economy will continue to grow because of the growing global population, which means more demand, and because of new products cycles which are increasing dramatically. Product cycles will become faster and faster, and the level of consumption will increase, too. The challenge is not growth, but risk which will significantly increase: from cyber risk, to fake news and all the risk associated with our multipolar, unpredictable world. And migration is and will stay a huge challenge too.
Growth is a no-brainer, but risk will significantly increase so that our focus needs to be on a public dialogue, and not to use the public to drive more protectionism. If people fear development, they will vote against globalization, global development and international collaboration, which will create more and more protectionism, so social acceptance is a critical challenge to address also. This is the reason why we as EY and I personally invest time and money in the engagement in organization like digitalswitzerland or the Europaforum where an open dialog between business, politics and society is the core of all activities.
(PR): What is your final message to the readers of this special supplement?
(MS): Individually people should invest in values. The differentiator for the future will be the strength of our value - whether that be integrity, teaming, intercultural understanding or diversity. Soft factors will be important because they cannot be substituted by robots or replaced by artificial intelligence. Understanding and learning languages as well as exposing yourself to different cultures are critical success factors.
Secondly, individuals must stay agile and should not wait to transform. Transform now so that you are in a position to invest your profit generated from the old world economy to create gains for the new digital world, the new platform based, client centric ecosystem future. If you don’t start now, the profit from the old world might stop and as a result, there is no money to build the new world. And last but not least it is difficult to predict the future. However, we can shape it - but we need to do it collectively, responsively and fighting inequality.