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2018 | Book

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Open Innovation Ecosystems

Creating New Value Constellations in the Financial Services

Author: Prof. Daniel Fasnacht

Publisher: Springer International Publishing

Book Series : Management for Professionals

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

Table of Contents

About this book

Sharing information and knowledge, co-innovating with clients, communities, and competitors and adopting cognitive technology, robo advisors, crowdfunding, and blockchain reflect current socio-economic behaviour. Emerging growth regions in Asia, demographic shifts, intergenerational wealth transfers and increasing regulations are other trends that amplify each other, disrupt the client journey, and affect the entire economy.

Moreover, unprecedentedly, new market entrants outside the financial sector, be it Amazon, Apple, Google, or Facebook, are increasingly expanding their scale and scope to offer financial services. Featuring case studies of Chinese business ecosystems, such as Alibaba/Ant Financial, that have transformed from displaying domestic and organic growth to rapid global expansion, this highly readable book gives you glimpses of how banking services are evolving. We break down everything you need to know about the foray of challenger banks into the financial services. You learn how they link health to wealth data and gain advantages through analytical capabilities in the race to attract sophisticated clients with highly personalized experiences.

The next level of creating and capturing value for clients and businesses involves platform models embedded in cross-sector ecosystems. Digital platforms are the crucial entry point to global markets, creating value for multiple sides. They leverage self-driving ecosystems that go beyond linear value chains applied in traditional business models as the sources of growth in an interconnected world are collaboration and network effects.

The winners will be those who open up and engage themselves in an ecosystem that transcends organizational boundaries and performs without sector borders because every actor contributes to the value constellation of the system.

The book provides practitioners and scholars with new insights into open and holistic business models, where competition in future will be between ecosystems rather than at the company level. It encourages leaders to expand their skills and think through the lens of the ecosystem theory while developing compelling strategies to serve the next-generation clients.

Frontmatter

1. Preparing for the New Reality

Abstract

Radical, incremental, and disruptive changes represent innovations and must be understood to develop a sustainable strategy. You will learn the differences and dynamics between various types of innovations. We illustrate them in a three-dimensional cube and explain how they interact with each other. Banks rose to the largest firms of the world, and at the same time, they are facing pressure from clients, policy-makers, society, and competitors as never before in history. Large banks imply systemic risks; however, herewith one may see the justification that banks remain necessary in contrast to the prediction made 20 years ago. Living in a globalized service economy driven by increasing digitalization, we rather argue that banking is necessary and banks as we know them today are diminishing in favour of online services. The banking, wealth, and asset management industry used to be paralysed over the last 10 years because of the burden of regulatory requirements caused by the financial crisis. Many incumbents missed to adapt their business models to the new reality and are recently threatened by fintech firms and new market entrants from outside the financial industry, mainly from emerging growth regions in Asia. As clients are expecting more digital, personalized, and seamless services than ever before, incumbents must not only understand the new reality and transform; the more they must embrace open innovation and collaborate with challenger firms in an ecosystem.

Daniel Fasnacht

2. Disruptive Trends

Abstract

The financial world has been in transformation as seldom before. In this chapter we explore the key drivers for change and explain trends and its implications in the context of the banking, wealth, and asset management industry. While some developments are going to disrupt business models of commercial and corporate banking and change the way we exchange currency, stocks, derivatives, and commodity in the near future, others may just incrementally improve wealth management services. It is crucial to grasp the speed and magnitude of disruptive trends to be able to master the strategic change. Based on the synthesis of studies from consultancy firms, scholars, and own research and experiences, we compiled four trend categories that converged to create a new business paradigm, namely, market, client, regulation, and technology. While demographics lead to an inevitable intergenerational wealth shift, in Asia, rapidly emerging growth regions generate enormous new wealth. Incumbent banks are threatened by e-commerce and technology firms like Alibaba and Tencent gaining market shares. Millennials and other underserved client segments are predisposed to switch their financial advisors. They are requesting digital banking platforms with robo-advisors, virtual agents, crowdfunding, and cryptocurrencies instead of brick-and-mortar banks and ATMs. We suggest embracing cognitive technologies such as artificial intelligence and machine learning to increase efficiency and effectiveness and satisfy the increasingly sophisticated demand of the next-generation clients. Every market participant needs to comply with new regulations to stabilize the global financial markets and to control shadow banks. Look at these developments as a chance to regain trust, innovate, and grow.

Daniel Fasnacht

3. Strategic Choices for Growth

Abstract

The changing businesses in the financial services are gaining momentum mainly due to rapid developments of digital trends. For firms to prosper, they need a profound understanding of growth and profitability. We analysed the largest banks in the world and found that they are much less profitable as they appear to be. Growing profitable and faster than investors expect is vital for listed equity firms to get further investments and gain competitive edge. Our case studies corroborate the meaning of profitable growth and explain how wealth manager can become really big. We discuss acquisitions, global expansion strategies, but also the importance of a strong brand value. What history and reputation are for financial centres, the imperatives for asset managers are size and scope. Firms such as BlackRock and Vanguard but also the growing sovereign wealth funds dominate the industry. Firms must address growth and innovation at the highest possible level to gain competitive advantage. Thus, we suggest appointing chief officer roles to foster growth. Finally risks increase exponentially with every participant in the ecosystem. Incumbents that manage an innovation portfolio, including internal projects and external businesses, must apply risk management measures like the venture capital industry.

Daniel Fasnacht

4. Open Innovation in the Financial Services

Abstract

The transformation of the financial services implies new forms of innovation. There was a slow uptake of open innovation after we introduced the concept to financial services in 2009. Meanwhile banks recovered from the financial crisis, and with the simultaneous arrival of multiple disruptive trends, they took up innovation as a route to grow, differentiate, and survive. The banking, wealth, and asset management industry is facing competition from new market entrants that embrace open innovation from the beginning. We explain open innovation as a facilitator to create value for clients and businesses as it fits perfectly into the era of sharing, collaborating, and digitalization. Knowledge on how to manage the transition to open innovation and on how to provide a culture based on openness improved. Open innovation is all about learning and collaborating with firms – both inside and outside the traditional financial services industry – to capitalize opportunities arising out of the disruptive trends. We discuss the amalgamation of products, services, and processes. Value derives from efficiency gains for the provider along the opportunity to collect and analyse vast amount of data. Open innovation is the prerequisite for future value streams and must be realized in the business models of incumbents as well as fintechs and non-banks. Basic understanding is essential before defining new strategies, also because it is the enabler for further engagements in innovation ecosystems.

Daniel Fasnacht

5. Open Innovation Ecosystems

Abstract

As you learned from open innovation, partnerships accumulate knowledge and accelerate innovation and growth. This chapter builds upon research on value constellations and their role in open innovation as an iterative model with the ability to create an ecosystem. Innovation ecosystems that are strategically linked through firms to foster idea generation, co-development, and collaboration are explored. As the first, we introduce hyperconnectivity as one fundamental principle of a business ecosystem. The world is a digital network, characterized by interdependency and integrated collaboration where everything is connected; hence, value can only be generated through mutual exchange. We broaden your understanding about how incumbents, fintechs, and non-banks link financial services to create ecosystems that provide clients with new experiences and added value. By tapping into the Silicon Valley, as the case in point of a geographically localized ecosystem, we introduce other smaller ecosystems relevant for blockchain like the Crypto Valley. The financial inclusion ecosystem of Ningbo represents how they can be used for developing rural areas and fighting poverty. In contrast, highly efficient cross-sector ecosystems that emerged in China out of the Alibaba Group became rapidly a dominant force also because they are increasingly spreading their reach into financial services. Based on our research, we discuss the success factors of an ecosystem incubator. Like economic areas and alliances, we assume global competition will be between ecosystems without borders of sectors rather than companies.

Daniel Fasnacht

6. Businesses with Ecosystem Mindset

Abstract

While large and traditional firms usually represent financial and organizational stability, fintechs are agile and flexible when it comes to transformational changes as they are part of disruptive business models. The characteristics could not be more diverse; the more stability and agility mutually exclude each other. The success of incumbents as well as startups in the next decade is predicted on being part of an ecosystem where they can acquire the capabilities required to innovate and grow. We provide a wide-lens view that expands business development to the entire ecosystem, considering the environment and all stakeholders. Financial institutions need to redefine their individual value chains and adopt an ecosystem mindset with value constellations. A dynamic client segmentation based on behaviour, supported by artificial intelligence and machine learning, provides a better understanding of client needs. The increasing client intelligence helps to develop new segments with innovative solutions. While some firms applied different models for automated investments, others test digital fund platforms as data supplier for the synthetic development of new products. Harnessing the ecosystem to develop underserved markets, create new businesses, or use cases for blockchain asset management and as a transaction management platform is what we discuss in this chapter.

Daniel Fasnacht

7. Ecosystem Services

Abstract

Winning firms opened their boundaries and are harnessing external knowledge, resources, and capabilities. Changing client demands, regulations, and pervasive technological change are the core areas where today’s human resources must develop new management practices. We acknowledged the ability to deploy partnerships as this is key for the transformation and for rapidly adapting business models. Management teams realized that they can only fully capitalize from innovation ecosystems if they provide an open culture and increase skills for collaboration and managing all the stakeholders. They must also learn to make better decisions with more instantaneous and insightful information about financial markets, products, services, competitors, and clients. Managing the volumes and complexity of data is another focal development that infuses all firms on all hierarchical levels. It will destroy several existing roles and creates new job profiles vis-a-vis machines. Overall to be successful in an ecosystem, leaders must develop ecosystem services that embrace disruptive business models. In this chapter we discuss an open organizational culture that fosters creative thinking besides exploitation and exploration strategies and the development of ambidextrous innovation capabilities. Lastly it is all about trust and the player’s engagement in the ecosystem build up on social capital.

Daniel Fasnacht

8. Banking for the Next Generation

Abstract

So far, we drew conclusions and formulated suggestions for the next decade based on the actual state of industry research, studies, and own experiences made in the financial services industry. Throughout the book, we followed a practical method to describe things as fact-based as possible so that findings are realizable. This chapter is different—based on assumptions and projections, we attempt to give you a picture about financial services in 20 or 30 years from now. We admit that the world looks different for the next generation with new economic superpowers China and India and wealth spots in favour of the old money countries in Europe and the United States. It is time to find procedures and tools to systematically explore the far future and extrapolate scenarios on how clients may live, think, and act. We provide an outlook for innovation and ecosystems in which partnerships lay the bases for the next-generation banking, driven by disintermediation and unbundling of financial services. Progressive business models from challenger banks entering the market from outside the financial industry, organized in widely connected ecosystems, may become the new benchmark for incumbents. There is no other option than to learn and collaborate, though, the far future is uncertain and puts adaptability to the test. Lastly, we give you a glimpse in state-led economic ecosystem with social credit systems and wide-ranging surveillance of all the individual’s and businesses’ activities.

Daniel Fasnacht

9. The Way Forward

Abstract

This chapter concludes the core of the book and presents actions required related to the discussed topics. It shall emphasize that it is not enough having understood the past to develop a vision and strategy for the future. Besides the comprehensive understanding of the disruptive trends, we need a conscious look at developments that influence the businesses. Regulatory requirements or demographics have different impacts based on your region, and emerging wealth spots or special client segments may not be relevant to all players in the banking, wealth, and asset management industry. We suppose one common ground to be the rise of technologies, including artificial intelligence, robo-advisors, peer-to-peer crowdfunding platforms, and blockchain technology. Incumbents must change and become more agile, collaborative, and client-centred, because the smart combination of financial experiences and knowledge with technology is key to survive in the new paradigm. Fintech firms will most likely increasingly collaborate with established financial institutions as they seek financial stability, client base, and trust. Overall, financial institutions are advised to shift to a platform business model that has the ability to evolve to a self-reinforcing ecosystem. Our selected 21 recommendations represent takeaways that shall motivate you to further explore the opportunities of open innovation ecosystems and project your individual journey.

Daniel Fasnacht

Backmatter

Title: Open Innovation Ecosystems
Author: Prof. Daniel Fasnacht
Publisher: Springer International Publishing
Electronic ISBN: 978-3-319-76394-1
Print ISBN: 978-3-319-76393-4
DOI: https://doi.org/10.1007/978-3-319-76394-1