Open Innovation Ecosystems: Creating New Value Constellations in the Financial Services

312 Pages·2018·5.36 MB·English

by  Daniel Fasnacht

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
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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