Changing the game

The evolution and migration of consumer and business activities into digital marketplaces is capturing an expanding share of the financial services marketplace. Evaluating the drivers and identifying the best opportunities are critical. Financial institutions, FinTech vendors, cyber players, and investors seek answers to ensure either survival or successfully riding the next wave of disruptive success.

The arrival of the Internet in the mid 1990s led some pundits to forecast the demise of the brick and mortar, or physical domain, for the financial services industry. While ‘brick and click’ have coexisted for over 10 years, the digital world has now achieved wide exposure and very high usage levels in most developed markets. Many emerging markets are now moving quickly with their own form of digital infrastructure on mobile networks.
The foundation for our perspective on the digital marketplace phenomena begins with IDC’s definition of a digital marketplace: an online, virtual marketplace where buyers and sellers meet. This definition encompasses the full range of buyer-seller models, including many-to-many, many-to-one, one-to-many, and one-to-one. IDC’s Digital Marketplace Framework defines how users connect through gateways, hubs, and nodes. This framework applies to all marketplaces and provides for a wide variety of participants.

Gateways are defined as on-ramps to the digital marketplace and share two important features: they contain a large index to web content and a large advertising platform that matches queries to ads. Gateways do not own content or sell products. Examples of gateways that are tailored to the financial services marketplaces include Google Finance, Yahoo Finance, and MSN Money, which are also further refined to a country market

Hubs tie together websites with valuable information about a specific area of interest or function. They act as filters of information, providing a more narrowly focused set of information and links. Hubs aggregate content related to products and services from multiple sources. They can help as brokers or as an efficient portal that provides rapid access for high value financial services. Examples of hubs in the financial services world include www.bankrate.com, www.lendingtree.com and www.esurance.com. Additionally, new startups, like Mint and Geezeo, use a hub model while taking on established alternatives like Quicken and Money.

Nodes are websites that function as a merchant storefront or marketplace where products and services are offered and purchased. Each financial institution on the web has a storefront that allows customers to get information, conduct business transactions, and, in many cases, acquire a new financial product or service. Non-financial institutions can also function as nodes when a website provides information that is relevant to a customer. Examples would include the credit bureaus that offer credit scores and credit protection services to consumers as well as selling credit reporting data to financial institutions, market data providers (and insurance data providers. New node forms like Zopa, Prosper, and Fynanz have emerged to address gaps in the marketplace by offering person-to-person loans.

Each of the financial industry segments has developed its own galaxy of digital marketplaces to address the range of products and services each offer and the various constituencies that interact around these products and services.

For insurers, technical requirements for implementing the digital marketplace rollout include an extensible architecture, an adaptable system that can integrate with legacy insurance applications, and a bulletproof environment. Other requisite initiatives comprise improvements to the web functionalities and marketing of simple products that integrate well with offline channels. Not withstanding its development to date, the digital insurance marketplace is moving at a much slower pace than banking and capital markets.

The pace of change has been both rapid and dramatic – especially for these industries which had been conditioned to slow, gradual changes in the delivery of services to customers and partners. This conditioning is partly due to the fact that each segment is regulated, and, in some cases, key products are insured by government agencies, industry cooperatives, or private insurers.

Since 1995, the more rapidly changing technology environment coupled with efficient, affordable, high-bandwidth access to the internet and mobile networks has created a demand side pull from customers. A self-fulfilling, virtuous cycle of better websites, content, and transaction fulfillment capabilities for all digital marketplaces has pulled the financial industry along faster than it would have developed on its own. That said, the consequences of expecting a plateau effect or being able to play catch up is dangerous for any institution. While digital marketplaces will never replace the physical market for financial institutions, each institution has to figure out how to balance and sustain its franchise between the physical and digital. Sooner is the best option because there may not be a later one.

Many consulting engagements have already been sponsored by and completed for financial institutions and some of their key FinTech vendors. Distilling the key parameters for evaluating the impact of digital marketplaces into a couple of paragraphs still provides a relevant point of view for reviewing an institution’s current strategy or helping one revise its current plans.

• Country level drivers and assessment questions may need to be adjusted based on the level of infrastructure, preferred methods for digital access by customers (the preference for the internet cloud vs. mobile SMS and WAP); the maturity of financial institutions and an institution’s ability to engage customers and prospects at each major stage of their business model.

Financial institutions need a hard assessment of their digital marketplace readiness beyond getting leads and educating/informing customers. In particular, the business processes associated with fulfillment and support need to be rigorously tested and highly reliable capabilities. Digital downtime is the equivalent to locking the doors of every financial institution during business hours and unplugging the telephone at the same time. Is your institution prepared to handle the influx and varying nature of digital communications in a timely and effective manner? And, if your institution experiences digital downtime, what is the contingency plan?

Financial institutions regardless of segment (banking, capital markets, insurance) are primarily information-driven organizations. The information flows between and among clients, intermediaries, and a financial institution’s headquarters and field operations will increasingly shift from the geographically-bound world to digital marketplaces. Baby boomers and Gen Xers will expect it and Gen Yers will demand it. Corporate clients will also be adapting their worlds to digital marketplaces and will expect their primary financial institution relationships to facilitate change or at least adapt to change.

Financial institutions that shape or enhance their business models to accommodate this disruptive shift will succeed; those firms that don’t will become fodder for the history books. A compelling and integrated presence in the digital marketplace is becoming just as important as the physical presence for the successful 21st century institution.

ã Financial Insights, an IDC company, May 2008

Barry Rabkin is Senior Research Analyst, Insurance Practice at Financial Insights.

•  IDC’s Digital Marketplace Application Infrastructure
• Rigorously answering a series of questions like these can lead to a more informed view of an institution’s potential:

Development How does the institution plan to facilitate and stimulate the search and discover schemes that its prospects and customers use today and may well begin using tomorrow? Do you know how customers find your institution and your competitors in a digital marketplace? Have your digital strategies and tactics stimulated the right activity?

Marketing Does your institution have an operationally effective lead generation capability based on its digital marketplace interactions? How does your institution use digital advertising and physical advertising/direct mail to stimulate leads? Can your institution improve upon the educational effectiveness and information value provided on your digital venues? Is social networking or other forms of viral marketing appropriate for your business model and firm?

Sales and fulfillment How well does your institution’s “shopping cart” function? Taking a new product application through to fulfillment – what is your abandonment rate? How aligned and seamless are your digital and physical fulfillment processes? What are the most common fulfillment complaints from your prospective or existing customers? What are the major differences between your most and least successful digital marketplace product fulfillment rates?

Support Is your digital help service operating parallel with your physical help service? Does the physical help team (e.g. online call center) have complete visibility into the customer experience for the top five or ten case problem types? If so, are the cure rates and satisfaction levels improving? If not, or if there is incomplete visibility, why is that? Do you measure post-closing satisfaction levels on a regular basis? If not, why not?