Old, hierarchical institutions have shown they lack
resilience to coronavirus. Their large properties, huge ivory towers designed
to be both imposing and reflect their status, are dragging them down. They
struggled to adapt to a digital world, let alone digital 2.0, or the coming
The future is one of digitally networked, decentralised
businesses and institutions. These are the businesses thriving in lockdown and
which will continue to thrive when a new digital-first consumer emerges from
isolation. In this article, I will compare the old systems of the Third
Industrial Revolution to the coming Fourth Industrial Revolution, and discuss
the ways legacy financial businesses can quickly adapt to become prepared for
the ‘new normal’.
Hierarchies vs. Networks (The Coming of The Fourth
Firstly, it’s important to explain what I mean when talking
about hierarchies and networks. In his 2016 Book, The Fourth Industrial
Revolution, Chief Exec of the World Economic Forum, Klaus Schwab, proposed that
technology was leading us into a new industrial epoch.
All three previous industrial revolutions had been built on
monetising labour, and making it more efficient by augmenting it with
technology. This symbiosis would drive greater efficiency, but at all stages,
humans of different levels of ability and skills were needed, and with it came
a hierarchical structure, with any networks existing purely as an afterthought.
However, for the first time in history, machines have
started to outperform the top-performing humans at certain skilled activities,
and this outperformance is growing at exponential levels. Equally, networking
technologies have connected the human species globally, digitally enabling more
than half the population. In addition, collaborative working tools have made it
easier for remote teams to work together in a more networked way, these tools
‘managing’ the workload and automating many of the tasks.
These three factors have meant old hierarchies are becoming
increasingly obsolete. The ultimate goal of industrial automation is to achieve
maximum efficiency, and the Fourth Revolution, built on a hybrid of physical
and cyber systems, is achieving that efficiency through interconnectedness and
Interestingly, coronavirus has amplified this effect and
will likely speed up the onset of the next industrial revolution. Being forced
to work from home, even old industries that were only just getting to grips
with becoming digitally enabled are now being forced to adopt digital-first
practices. Only the more agile ones will survive.
The Major Banks vs. Fintech Challengers
The Covid-19 crisis produced a markedly different response
between the major banks such as Barclays, Lloyds and NatWest, and the
challengers such as Monzo, Revolut and Starling. In the old model of banking,
hierarchies existed because customers across the wealth spectrum needed
servicing in different ways. Analogue money needed huge amounts of property to
store this wealth, often in imposing, intimidating and ultimately expensive
vaults. Then money went digital.
Networked banking is a far superior model when the money
itself is networked and more decentralised. The issue the major banks have is
legacy. Everything from their software, processes, property, mindset and
traditions rely on hierarchy, so change is expensive and often cannabilises
their core offering or products that have traditionally made them money.
But it was precisely these legacies that made them slow to
respond to the demands put on them by the government. When the government
promised to underwrite 80% of the risk, the banks still retreated to safety,
only issuing 980 loans against 130,000 enquiries before Chancellor, Rishi
Sunak, intervened with a slap on the wrist.
In contrast, the challenger banks, already adopting
work-from-home practices, were business as usual. The financial impact on their
daily operations are minimal, and they can provide a safe working environment
for their employees.
Eventually, some of the fintechs, such as Oaknorth, Starling
Bank and Funding Circle, were also drafted in to support in issuing the
Government-backed CBILS loans. Their data-driven approaches have allowed them
to issue these loans much faster, with Oaknorth identifying they could
distribute loans to as many as 50% of their customers in much less time than
the traditional banks were able to issue them to 1% of applicants.
Networks are generally stronger when more people operate
within them. More data points create better data, which leads to clearer and
more actionable insights and greater efficiencies. Hierarchies require
gatekeepers, who hoard proprietary data within its own hierarchy, making it
cumbersome to take action when things are changing. The insurance industry is
particularly exposed to this truth.
The insurance industry had the potential to save many
businesses in this crisis, but they won’t. As such, it will be left for the
Government to bail them out or they will go bankrupt entirely. Most business
interruption policies exclude health pandemics, unless you have a specific
pandemic clause or policy.
Hiscox, one of the largest global insurance providers and
one of the first insurance companies to announce the predicted impact of
Covid-19, is expecting to pay out just $150m. This for a company that wrote
$3.8bn worth of premiums in 2018. The industry itself announced they are
predicting a payout of £1.5bn, which is tiny when you consider the government’s
£350bn stimulus package for the economy.
The very protections that are setup to allow businesses to
survive a crisis are clearly not fit for purpose. Whether that’s an issue with
education (not knowing what products to buy), poor selling (not selling
adequate cover), complacency (a pandemic will never happen) or awareness (I
didn’t know I wasn’t covered), if insurance isn’t providing adequate protection
for very likely eventualities then it’s nothing more than a stealth private
tax, rather than an actual protective mechanism.
Enter the disruptive insurtech companies. Companies like
Surround develop policies built around the lifestyle of their consumers,
meaning they are adequately covered for their needs without being over-insured.
Going one step further, the peer-to-peer insurance companies like Lemonade and
Friendsurance are literally leveraging the power of networks by allowing groups
of friends or communities to enter their own insurance pools, with research showing
community members are less likely to file false claims when they insure this
It will only be a matter of time before all insurance is
networked, allowing both businesses and individuals to be insured to exactly
the level they should, and eliminating a lot of the inefficiencies and even
fraud that’s rife in the industry. I predict that peer-to-peer insurance will
snowball as many business owners look for alternatives after feeling let-down
by the industry that was meant to protect them.
Stock markets & investment banking
Not too dissimilar to banks, stock markets went from being
heavily reliant on property, to massively downsizing as exchanges around the
world went digital. However, unlike the banks, stock markets and investment
bankers have been far quicker to benefit from digital adoption, mainly because
the potential financial rewards made it worth the effort and investment.
Data quickly became digital, led by data pioneers, Bloomberg
and Reuters. Challenger exchanges came through, using technology to lower the
costs of listing and maintaining compliance. More new markets appeared when we
saw the advent of decentralised technology, such as blockchain and
cryptocurrencies. Then we saw the rise of the stock market fintechs, companies
like eToro, Robin Hood and Freetrade, who are democratising access to stock
Despite being a much faster-moving marketplace, many of the
major institutions servicing the market are still structured like hierarchies.
For example, if you deal with one of the wealth managers such as Coutts or
Investec, the more money you have, the more senior and experienced your advisor
And within these institutions, as you make money you earn
bonuses, so there’s a huge incentive to reach the top. Even though you may theoretically
make an individual client less money than if they just invested in the FTSE100
or S&P500, you could end up with a bigger bonus. Unbelievably, as many as
87% of domestic US equity funds underperformed against the S&P500. A large
part of this disconnect is down to proprietary data being siloed by these major
institutions and the monopolies held by the main big data players.
As markets become more democratised, human sentiment will
likely play an even bigger role in market movements. That’s why my company,
Pynk, is pioneering the concept of Wisdom in Crowds: the idea that a large
networked user base that’s intrinsically connected through a platform can
correctly predict major movements in the stock market.
Our proprietary AI, Rose, is the necessary addition,
gathering vast amounts of data within this network and outside of it, to
identify those in our community who are exceptional predictors in certain
circumstances. Using this approach allowed us to accurately guess every major
movement in the price of Bitcoin throughout the Covid-19 crisis. This result
would have been impossible in a hierarchical analyst structure.
Additionally, in a post-coronavirus world, that sentiment
will be further driven by purpose. Already thriving ESG (Environmental, Social
& Governance) funds are predicted to grow even further in prominence,
perhaps driven by our realisation that mass action can positively, and quickly
affect the environment.
Hierarchies have to sell structured products, whereas
digital networks can allow individuals, or small groups of people, to choose
their own fund structures, based around their personal beliefs and values. I
predict a huge rise in personalised funds and indices post-coronavirus.
5 top tips for surviving the new normal
So what can you do to prepare for the new normal? Whether
you’re a new player entering the market, or an established company looking to
be future-proof, here are some ideas that might help you.
Build purpose into your core. Focus on people, planet and
wellbeing and the profits will follow. And more importantly, be authentic.
Consumers can see through contrived altruism.
Create human-centred products. Platforms are the interface
between humans and machines. If your User Interface (UI) is terrible, the
connection will be poor and will result in a poor network. Use design-thinking
specialists to develop your UX and UI to make them effective, efficient and
sticky for your users.
Become digital-first yourself. Both in terms of your
products and your internal working practices. The benefit of this approach is
that it will save you a lot of money as you can reduce your property (and
carbon) footprint. It will also make your team more productive, as research has
shown that work-from-home organisations are more productive with their time.
Equally, even your least digital-savvy customers will come out of the crises
with better IT skills, so will demand better digital products.
Treat property as a luxury, not an essential. Further to
point three, property is expensive. If you have a lot of property either sell
it off, or transition them into events spaces and experiences centres.
Consumers will still want to meet face to face, but they are more likely to engage
around specific events or attend a pop-up.
Service vulnerable people in different ways. It’s said that
servicing the least accessible 5% of society accounts for more than 80% of the
cost. This can be solved by innovation, not expense. Run a hackathon to solve
accessibility problems. Have dedicated digital apps rather than making a
one-size-fits-all. See point four
Without wanting to underplay the extreme sorrow and
destruction to normality many people are facing, coronavirus is an opportunity.
The rewards for getting it right, in terms of the wealth and health of the
global population, are incredible. If there is any silver lining to be found in
this time of crisis, it’s the fact we can start many industries anew, building
them again from the ground up.
It’s been said it takes 66 days to form a new habit. The
disruption to the old ways of working will be so great and last such a long
time that these habits will become deep-routed. The change will come – which
side of history will you be on?
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