Open Innovation Ecosystems: Creating New Value Constellations in the Financial Services PDF
Preview Open Innovation Ecosystems: Creating New Value Constellations in the Financial Services
Management for Professionals Daniel Fasnacht Open Innovation Ecosystems Creating New Value Constellations in the Financial Services Second Edition Management for Professionals Moreinformationaboutthisseriesathttp://www.springer.com/series/10101 Daniel Fasnacht Open Innovation Ecosystems Creating New Value Constellations in the Financial Services Second Edition DanielFasnacht Zurich,Switzerland ISSN2192-8096 ISSN2192-810X (electronic) ManagementforProfessionals ISBN978-3-319-76393-4 ISBN978-3-319-76394-1 (eBook) https://doi.org/10.1007/978-3-319-76394-1 LibraryofCongressControlNumber:2018948373 #SpringerInternationalPublishingAG,partofSpringerNature2009,2018 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpart of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionor informationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodologynowknownorhereafterdeveloped. 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ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland For my support staff Katrin, Simon, Julius, and Nelly Foreword Openness and collaboration, a myriad of technological advancements, increasing regulations, new wealth spots, and future demographic shifts and inter- organizational wealth transfers are trends that are hitting banks today. As never before all happens at the same time. This not only changes society and world economicorder,butalsotransformsthefinancialsectoraswehavenotexperienced before. Daniel Fasnacht’s investigation into open innovation ecosystems comes at therighttime andisanessentialcontribution totheliteratureasitdiscusses trends andwaysonhowtonavigatethroughthedigitaleraoffinancialservices,especially asopeninnovationandcollaborationinnetworksreflectthezeitgeist. Istartedmy career inbanking back inthe 1960sat Deutsche Bank andin 1970 joinedWhite,Weld&Co.,aNewYork-andZürich-basedinvestmentbank,partly ownedbyCreditSuisse,untilthesaleoftheNewYorkoperationtoMerrillLynchin 1978. Subsequently, Credit Suisse bought a participation in First Boston Corpora- tion which was later merged with the European part of White Weld to operate as Credit Suisse investment bank. You can imagine that banking looked completely different and we were facing other challenges than today. At these times, banks ownedtheholygrailoffinancialinformation.Ifyouwantedtoknowwhatwasgoing on in financial markets you had to go to a bank. Stock and bond markets were opaque,andinsiderknowledgewasanecessitytooperateprofitably.Thatchanged graduallyinthe1980swhenmorereliablecomputingtechnologyallowedbanksto build systems which enabled us to trade bonds 24 hours around the world, from London to New York to Singapore and back to London. Our early million dollars investmentsinmoderntechnologyatthistimepaidoffhandsomelysinceweearned 100milliondollarsayearin1985withonly10traders.Butitalsobecameclearthat onehastocontinuetoinvestintherapidlyevolvingtechnologytostayinbusiness. Theothertechnologicaleffectwasgrowingtransparencyinthemarkets,whichwas good for investors and banks as volumes exploded and margins narrowed. New productsemerged,likeinterestrateswapswhichbecameoneofthebiggestmarkets. Itenabledcorporations,governments,andmunicipalitiestoswaptheirliabilitiesin fixed or floating rate interest. This was one of the most profitable businesses for banksuntilmarkettransparencyinthe1990serodedmarginstoaminimum. In 1991, I was appointed to the Credit Suisse management board in charge of globaltradingandin1998asheadofthePrivateBankingdivision.Ibecamegroup vii viii Foreword CEOin2003andledthebankuntil2007whenIretired.In2009,UBSappointedme asgroupCEOtorestoreprofitabilityandthecapitalbase.Afterthejobwasdone,I retiredforthesecondtimein2011.ThetimebetweentheInternetbubbleandbefore the financial crisis of 2008 was characterized by strong growth, high profitability, acquisitions, and global expansion. With cheap money and optimistic outlooks for the future, banks increased their leverage and developed new and risky finance methods. Junk became respectable in the markets. There was a strong belief amongmanyplayersinthemarketthatshort-termfinancingwillalwaysbeavailable. At Credit Suisse we run a one-bank strategy that promoted the inter- organizational collaboration, including revenue streams. Investment banking, pri- vatebanking,andassetmanagementworkedhandinhand.Therewasfullalignment ofmultipleclientinterfacesandsolutionresourcesamongalldivisionswithfastand efficientaccesstospecialiststhatofferedbestinclassproductsandservicesbeyond pure investment management. Offshore as well as onshore businesses, entrepreneurs, executives, wealthy families, individuals, retail clients, and intermediaries all received their individual value propositions. They trusted their financialadvisors,andtherisingglobaleconomyfacilitatedthesuccessofthebank’s divisions. The vision was to become the world’s premier and most admired bank, renowned for our expertise in investment banking, private banking, and asset management and valued for our advice, innovation, and execution. We set new standards in partnering with our clients and new standards in providing them with innovativeandintegratedsolutions.Astoday,culturaldiversitywasessentialtoour success. After Daniel Fasnacht adopted the concept of open innovation from the manufacturingsectortothefinancialservicesduringhisPhDresearch,joiningCredit Suissein2005,weempoweredourpeopletoworkopenlyandrespectfullywitheach otherandwithclientstodeliverresultsthatleadtosuccessandprosperityforallour stakeholders. However, open models for business and collaboration across the organization were in the early stages of development. One exception was open architecture where Credit Suisse was one of the first banks that offered clients third-party products that best suit their needs. Though the bank had its own funds, it provided financial products developed by its competitors. This open fund archi- tecture was a first step towards open innovation and warmly welcomed by clients and the market. The two largest wealth managers by that time, Credit Suisse and UBS, invested between 50 and 70% into third-party products for their managed fundsportfolio. Investment banking in the mid-2000s was bathing in exuberance and nothing seemed impossible. The leveraged credit markets grew rapidly,and investors were hungryforhighreturns.Sub-primemortgagesintheUSAofferedanopportunityof great profit potential when repackaged in different tranches with declining credit ratingsandincreasingyields.Theratingagencieswerehappytoprovidetheratings, and investors were happy to buy the bonds relying on the ratings. A seemingly never-ending stream of mortgages could be repackaged and sold at good profit margins for banks and rating agencies. Investment banks generally knew that the ratings were much too good, as did the banking supervisory authority, but no one Foreword ix could resist the greed for profit. Warnings that the applied credit ratings might not reflectthevalueoftheproductwentunhearduntilBearSternsandLehmanBrothers got liquidity problems and had to be sold or closed. The resulting losses from overleveraged banking balance sheets led in 2008 to an erosion of trust in banks andsubsequentlytoaglobalfinancialcrisis. Intheaftermath,weunderstoodthattooopenmarketswithtoomanyinnovations in terms of financial products together with lax risk monitoring, supervision, and greedwerethetoxicmixture.Manybankslearnedfromtheirfailures;however,they missed opportunities in the last 10 years since policy-makers took over power followingthefinancialcrisis.Asapersonwholearnedoverdecadeshowtohandle risk,IarrivedatUBSinthemidstoftheturmoilwhengovernmentswerebailingout privately held banks. I realized that this event will seriously impact the financial sector. Politicians blamed the regulators and the regulators blamed the bank man- agement.Banksupervisoryauthoritiesacrosstheworldwerequicklyempoweredto come up with new regulations to prevent any repetition. It was clear that bank managementhadfailedtohandletheirresponsibilitiesbutalsoregulatorshadfailed toquestionthemarketdevelopmentandbankleverage. Trust of clients in their financial advisors and in the overall banking sector has faded away. Low trading activity due to stricter regulation, higher capital requirements, and anaemic GDP growth in Western economies led to decreasing profitability.Thereversetrendofwealthmanagerstofocusmoreondomesticassets insteadofexpandingintogrowthregionstogetherwithincreasingtransparencyand regulatory measures in the asset management industry made these businesses less profitable.ThequantitativeeasingprogrammesbytheFederalReserveintheUSA followed by central banker activities worldwide with low and in some economies evennegativeinterestratesacceleratedtherisk-averseprocessofthefinancialsector, especially in Europe. The big European banks had to reduce their investment banking departments to the benefit of the US banks who took back their market share—ironicallythesamebusinesswhichweboughtthreedecadesbeforefromthe Americans.Today,theoutlookforEuropeanbanksisverymuchthesameasitwas fortelecomcompanies20yearsago;yearsofstagnationlieahead. Besides the negative expectations there are also opportunities for banks and wealth and asset managers in the coming years if they are able to move, innovate, transform, and particularly collaborate. The shift from closed to open banking models may become a new industry standard to free clients’ financial data. Tradi- tionalbanks,whichcurrentlycontrolaccesstodata,willberequiredtoallowclients to permit any third-party provider to access their accounts. The Revised Payment Service Directive (PSD2) for Europe became recently implemented and opens the doorfornon-banksenteringthepaymentsservicesbusinessesforretailclients.The whole open banking movement, referring to the use of open APIs to enable third- party providers to build applications and services around the financial institution, leadstoevenmoretransparencyofaccountholdersrangingfromopendatatoprivate data. There are new opportunities for banks if they partner with fintechs and technology and cloud service providers to add value to clients and intermediaries. Collaborationsbetweenbanksandtechnology,e-commerce,orsocialmediafirmsas x Foreword we see it today with Apple, Amazon, and Facebook partnering with Bank of America, JPMorgan, and Goldman Sachs, among others, were unthinkable during myprofessionaltime.Thatlargebanksengageinecosystemswithdiverseplayersto learnfromeachotherandco-createvalueisalsosomethingnewandatrendthatwill mostlikelyintensifyandthusneedsfurtherinvestigation. Thisbookdescribesexactlywhythefintechsub-industrycouldemergeandwhat incumbent banks neglected during the last 10 years and especially what regulators andpolicy-makersmisunderstood.AndIdon’tmeanjustthethousandsofchallenger banksacrosstheglobethatwanttoeatthebanker’slunch;Iamtalkingaboutglobal economicpolitics.WhileintheEuropeanUnionthefocusisonriskavoidanceand regulationand thebelief that governmentcansolve anything,emerging anddevel- oping economies create new technology-driven financial services ecosystems with theadvantageofnolegacy.Withastonishmentandgreatconcern,Iseethebiggest and most successful banks in the world today evolving in China and the USA. Europehascurrentlynobankingchampion. Ibelievebankswillbeunrecognizablein10years’timeandagreetotheauthor’s findings. It is not only because of high charges for little added value or due to increasingdigitaltransparency,butalsobecausewearefacingdemographicchanges andanunstoppabletechnologicaltransformationsimultaneouslythatplaysintothe hands of the next generation. We must invest into artificial intelligence and imple- ment those technologies into financial services processes. Blockchain technology will one day dominate many banking businesses. Therefore, it is important that politicsandindustrialbodiestaketherightmeasurestofosterforinstancetheCrypto Valley in Switzerland as a leading hub for initial coin offerings (ICOs) and blockchain asset management. Such small ecosystems have the potential to grow andbecomeimportant. State-ledgrowthinitiativesandabusiness-friendlyenvironmentinAsiaproduce millions of new entrepreneurs and start-ups every year. The economy is booming, andwealthisincreasingandwiththoseingredientscountrieslikeChinathathavethe biggest domestic market can test new business models, production methods, smart cities, and the like. The rise to a modern economy with a too big to fail financial system and military superpower is just a question of time. I like the case of Ant FinancialGroupasitillustratesthattechnologicalcapability,innovation,andgrowth through a value constellation in an ecosystem is the future model. To me it is not surprising that the valuation of Ant Financial is a third higher than that of Credit Suisse and UBS together. And if linked to the wider ecosystem of its owner, the Alibaba Group, the valuation comes close to that of the largest firms. It is not surprisingthatfirmsfromoutsidethefinancialsectorwillsoontakeovertraditional banksiftheyresisttorenew. IncontrasttowhatIexperiencedduringmycareer,Istronglybelievethatthenext generation of banks will service their clients much more innovatively, efficiently, and economically and will have no place for extensive hierarchies. Clients will be able to choose their investment profile electronically and get the best information availableontheirinvestments.Orderexecutionwillbefast,inexpensive,andonline be it for stocks, bonds, or payments. Stock exchanges will be merged or
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