What will really disrupt SA’s financial services industry?

As 2015 drew to a close, and South Africa appeared to be on the brink of ‘disruption’ (or at least intense fragmentation) on a number of different fronts, a much milder war of words was unfolding between the eminence grise of disruption theory, Clayton M. Christensen of Harvard Business School, and The Economist.

At issue was: what really constitutes disruptive innovation in the business world and which concepts are really worthy of the title? Why should we care about such a fine theoretical point?

Because grasping the distinction has far-reaching implications for where the financial services industry may well need to go if it wants to stay relevant in South Africa. More importantly, we don’t believe the financial services industry is remotely paying enough attention – not just to potential disruptions, but to necessary disruptions if the industry is to play a meaningful role in South Africa’s future financial stability and growth trajectory.

In Christensen’s notion of disruption, for example, it is questionable whether Uber, as a business, should be held up as a disruptive business model. Christensen argues that Uber’s model (although highly successful) failed to fulfil several critical tenets of disruption theory.

It’s incursion into the world of taxi servicing did not really introduce an alternative that was so much lower priced, simpler, or differently positioned as to open up taxi services to a whole new market of consumers. Effectively, by making the taxi experience that much more appealing and convenient, the current consumers of taxi services simply switched their allegiances.

In other words, Uber represented an excellent case of a traditional product performance trajectory where the process of elevating the quality and breadth of an existing business model simply happened at such a highly accelerated rate that the incumbent was left in the dust.

Christensen argues that if we don’t really understand what we are competing with, our strategy for countering its challenge could be misguided. How a business responds to an interloper who is nibbling away at its current client or customer base with a more appealing variation of an existing service is very different to how they would need to respond to a disruption threat that was addressing a totally different and unperceived need or service – one that would be operating from a totally different cost base.

Over time, this new value proposition would quietly evolve to the point that it is far more compelling than the incumbent offering. So, while the interloper may appear to have been operating in a totally different space and appealing to a very different market, the true disruption occurs when your market also converts to this new value proposition.

Using Christensen’s interpretation of disruption then, what really are the points of vulnerability for the financial services industry in South Africa? Do such concepts as passive investing, smart beta, robo-advisers and the ?like really constitute disruptions in their world?

Certainly the concepts mentioned here challenge the existing business margins of mainstream financial services companies. Profitability will most likely be negatively impacted over the short term. But because regulatory change is playing a significant role in forcing the hand of companies here, shareholders will likely understand the new landscape and play a waiting game for now. We don’t see many companies going out of business with these changes, as such.

And for sure, many of the perceptions of where the industry adds value are likely to be further challenged, i.e. that asset managers have skill and can add value or that financial advice can’t be offered in a formulaic or algorithmic fashion far more objectively and cost effectively. So robo-advice will likely draw in (or back) investors who have become disaffected with those initial promises.

But let’s put these innovations to the Christensen test: how likely are these innovations to open up the world of finance and investing to a whole new market – to mainstream South Africans?  

Passive and smart beta strategies may lower fees but the quantum difference does not suddenly make investing accessible – that’s not the only cost in the delivery equation that needs to be addressed if we are genuinely going to service savers who, realistically, will need to be able to save and invest for the future in cent-by-cent increments. And robo-advice may mean you can reach a far broader market than you could when you compare it to the world of one-on-one financial advice.

But robo-advice’s viability is predicated on two (potentially three) conditions: that the user has a minimal degree of fluency around technological and financial concepts, that the individual understands how to meaningfully integrate financial products or thinking into their lives, and – finally – that the individual has access to discretionary funds to act on the robo-advice. All of those conditions are hugely problematic in the South African context.

Perhaps the answers to our questions rest in a better understanding of the Christensen/Economist debate that we alluded to at the outset. The Economist article suggests that Christensen’s definition of “disruptive innovation” simply isn’t broad enough or evolved enough to address today’s business challenge. (Christensen probably wouldn’t disagree.) What The Economist feels is missing, is the recognition that when you disrupt an industry by reinventing a whole category of product (as Apple has been able to do with the iPhone in terms of developing its abilities such that it transforms into an all-purpose computer), it doesn’t really matter which end of the market is really attacked: low- or high-end.

In addition they suggest that true disrupting success comes when a business is able to eliminate critical “pain points” in an industry. When that occurs the new model is able to not just open up the gates to a new market, but instantly captures the old market (without Christensen’s requisite long lead times for the disruption process). Under this definition, the Uber model becomes disruptive.

So here then is our answer: To truly disrupt the South African financial services industry such that it not only opens the market up to millions of South Africans, but meaningfully addresses their needs and “pain points”, we would need to go significantly beyond the “surface fine-tuning” provided by robo-advice, passive investment strategies, or the addition of new asset classes.

We would need a service provider who could conceptualise and deliver on the following:

• We need products that actually help/teach people how to solve the real financial problems they face – holistically.
  Let’s use one simple example: If housing is a top priority for me and my family, how do I construct a roadmap that gives me that step-by-step process to realising that dream? This is not just a question of getting access to financing; it’s about taking people through the whole complex process of knowing how to re-arrange their budgets and buying ?habits to secure that funding; how to build up the necessary credit profile; how to navigate all the complex legal and regulatory aspects that home ownership entails; how to help them determine which protections are worth having to protect this asset … and which aren’t really. Effectively, what if the product I got from my financial service company ?gave me all that – with the full knowledge that at day one I have nothing but my existing salary?

• We need a framework that allows people to affordably save and redistribute literally pennies at a go.
  All the goodwill in the world about helping people learn how to employ their income more effectively pales under the challenge of being able to administer a tiny quantum in the system. When you are starting with only a salary and existing budgetary constraints, the only way to turn the ship of fortune will be incrementally. Right now, our industry has neither the patience, the know-how, or the appetite to engage here with these tiny increments. That said, financial service companies that don’t address this challenge first and foremost will be ripe for disruption – and at this point in time, that pretty much covers the whole of our existing industry.  

• Finally, we need a business model where the product you are selling is effectively open-access to the advice and coaching that is relevant to that individual’s long-term aspirational needs and provides the individual with the necessary protections along the route to give them their greatest chance of meeting those needs.
  

If this sounds like something that you think already exists, think again. Our financial advice industry is predicated on the fact that individuals who come to them have disposable income that either needs a home of some kind or that can be applied to some long-term agenda. Our current financial advice industry couldn’t remotely cope with the real needs of the broader South African population – primarily because the gap between debt (financial crisis) and financial well-being has yet to be effectively bridged by our industry. This must be the critical starting point.

But what if we, or our employers, changed our mindset? What if we began to think of financial stability and financial well-being with the same mindset that is applied to an employee’s physical and mental well-being?Employers already intuitively understand that there is a link between employee health and productivity. As such, most are quick to insist that their employees are provided with the protection of a medical aid scheme.

This scheme, in turn, provides them (to varying degrees) with access to emergency care, health professionals and specialists, and whatever resources might be necessary to cure or keep people healthy. For many schemes the focus is equally strong on being proactive around one’s family’s health. By providing constant rewards and nudges to be proactive about our health and diet, the thinking is that this will keep medical care demands to a minimum.

Surely it’s in employers’ interests to keep their employees financially stable as well?
The more we understand about employee well-being and stability the more we appreciate that the link to productivity is just as strong when it comes to financial stability. As such it seems only logical that we address this aspect of our employees’ well-being with the same resolve.

Imagine an aid scheme where the focus now shifts to securing financial stability. Under this new convention, every employee, no matter what their financial starting point, would be provided with equal access to financial advice, financial coaching and financial roadmaps that would enable each individual to either get a leg up to the next level of financial viability or to, at minimum, hold them on a steady course to financial stability.

Now we’re talking disruption! It’s a disruption set to impact the entire employee spectrum. It’s a disruption that has the potential to completely change the way people engage with the industry. It’s a disruption that could reverse our notions of trust, and route the concept of “service” back into financial services.

Interested now?

* Anne Cabot-Alletzhauser is head of the Alexander Forbes Research Institute, an initiative that looks at the full spectrum of savings, investment and wellness issues that confront South Africans in particular, and Africans in general. 

This article originally appeared in the 28 January 2016 edition of finweek. Buy and download the magazine here.