Académique Documents
Professionnel Documents
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T H E D I S R U P T I O N R E P O RT
The biggest
transformation
ever
If youre a leader in todays world, whether youre a government leader or a business leader,
you have to focus on the fact that this is the biggest technology transition ever. This digital era
will dwarf whats occurred in the information era and the value of the Internet today. As leaders,
if you dont transform and use this technology differentlyif you dont reinvent yourself, change
your organization structure; if you dont talk about speed of innovationyoure going to get
disrupted. And itll be a brutal disruption, where the majority of companies will not exist in a
meaningful way 10 to 15 years from now.
This digital age is the connectivity of going from a thousand devices connected to the Internet
to 500 billion. It will transform business. It will transform our lives, our healthcare system.
Business models will rise and fall at a tremendous speed. It will create huge opportunities
probably $19 trillion in economic value over the next decade, incremental above what were
seeing today. Thats the size of the US economy, plus some.
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T H E D I S R U P T I O N R E P O RT
...you either
Global flows of trade and finance are flattening, while data flows are soaring
TRADE
FINANCE
DATA
45X
growth in
data flows
20052014
1980
2014
The
new era of digital globalization
Digital technologies are changing how business is done
Large multinationals
Attain
truly also
globalresult
scale with
But
it will
in new
tremendous
markets and suppliers
Useso
digital
platforms to find
disruption. And this is where its
importantwhether
TRADE
FINANCE
theyre
countries or companies, regardless of their sizethat you50M
either
disrupt or you get
on Facebook, 10M on Alibaba,
New strategies for products,
2M on Amazon
assets, organization
disrupted.
Probably 40% of the enterprise customers around the world
will not exist in a
45X
meaningful way ten years from now. When I said that two and three years ago, my CEO
counterparts said, Hey, John, you called the other transitions right, but Igrowth
thinkinthats way too
Startups I think now most CEOs would agree. If they dont change,
Individuals
aggressive.
they
get left behind.
20052014
data flows
New2014
ways to work, learn, and
communicate across borders
SMEs
Large multinationalsGlobal flows increase economic growth
Attain truly global scale with new
markets and suppliers
10%
Startups
$2.8T
GDP increase from data
flows, larger impact than
goods trade
~50%
Source: Digital Globalization: The New Era of Global Flows, McKinsey Global Institute, March 2016)
10%
$2.8T
~50%
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T H E D I S R U P T I O N R E P O RT
company. This is
about exponential
change
Global flows of trade and finance are flattening, while data flows are soaring
When many people think about this, you want to think about the intelligence of an architecture,
where you can get access to any data, any point and time you want. Its simple to describe, but
it really means youre dealing with intelligent networksa next generation of the Internet, if you
TRADE
FINANCE
DATA
will. But connecting 500 billion devices doesnt get the job done. Its the process change behind
it. So youve got technologies like cloud or mobility and cybersecurity and the Internet of Things
that are very important. Thats actually the easy part.
45X
The hard part is how do you change your organization structure? How
1980
growth in
data flows
do20052014
you change
2014
your
culture to be able to think in terms of outcomes for your customers? Its all about speed of
innovation and changing the way you do business. The majority of companies will be digital
technologies
business
is done
within five Digital
years, yet
the majority of are
their changing
digital effortshow
will fail,
which speaks
to what a CEO has
to do differently.
digital
platforms
to find
Not stay doing the right thing too Use
long,
if you
will. Thats
what got companies in trouble in the past. But the rate of change then was much slower.
2Mfabric
on Amazon
about digitization being an integral part of the
of a companys
business strategy or the way it interfaces its supply chain with its customers. Not enabled by
technologytechnology will become the company. This is about exponential change.
Startups
Individuals
Foreign
customers,Companys
financing,
McKinsey&
suppliers from day one
Our Insights
March 2016
10%
$2.8T
GDP increase from data
flows, larger impact than
goods trade
~50%
Source: Digital Globalization: The New Era of Global Flows, McKinsey Global Institute, March 2016)
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TABLE OF CONTENTS
6
The new era of global digitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
TRADITIONAL FLOWS OF GOODS AND SERVICES HAVE DECLINED 6
THE BIGGEST ONLINE PLATFORMS 7
GLOBALIZATION: THEN VERSUS NOW 9
INTERNET OF THINGS
11
The next industrial revolution: The Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
THE SIZE OF THE INTERNET OF THINGS MARKET 11
How will the Internet of Things impact the financial services sector? . . . . . . . . . . . . . . . . . . . . . . . 13
How will self-driving cars change our way of life? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
DIGITAL BANKING
19
The epicenter of disruption: FinTech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
THE FINANCIAL SECTORS MOST DISRUPTED BY FINTECH
OVER THE NEXT FIVE YEARS19
Neobanksthe banks of the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
TRADITIONAL VS. DIGITAL CAPEX COSTS 21
FinTech is forcing banking to a tipping point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FINANCIAL INNOVATION IS AT THE TIPPING POINT IN U.S. AND EU 23
PRIVATE FINTECH COMPANIES CAPITAL DEPLOYED BY SEGMENT 24
Bankings Uber moment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
COMMERCIAL BANK BRANCHES PER 100k ADULTS BY REGION 24
AT THE TIPPING POINT OF FTE REDUCTION (MILLIONS) 25
BLOCKCHAIN POSITIVES AND NEGATIVES 26
ATTRACTIONS OF BLOCKCHAIN OFFERING 27
ATTRACTIONS OF BLOCKCHAIN OFFERING 27
FORMIDABLE CHALLENGERS: MARKETPLACE LENDERS 28
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iv
TABLE OF CONTENTS
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GLOBAL DIGITIZATION
GLOBAL DIGITIZATION
The new era of global digitization
McKinsey Global Institute wrote:
The rapidly growing flows of international trade and finance that characterized the 20th
century have flattened or declined since 2008.
Exhibit E1
TRADITIONAL
FLOWS OF GOODS AND SERVICES HAVE DECLINED
After 20 years of rapid growth, traditional flows of goods, services, and finance have declined relative to GDP
Flows of goods, services, and finance, 19802014
$ trillion, nominal
53
49
Finance
46
Services
Goods
37
32
26
24
-14 p.p.
41
23
21
22
24
22 23
24 24
6
5 5 5 6 6
3 3 3 3 3 3 3 4 4
1980
1990
27
29
29
32 32
32
35
12
10 11
2000
31
30
17
10 9 10
8 9
41 41
37
21
24
22
26
38 37 39
29 28 28
30
18
13
2007
2014
SOURCE: UNCTAD; IMF Balance of Payments; World Bank; McKinsey Global Institute analysis
expanded their supply chains and established new bases of production in countries with
low-cost labor. Global trade in goods soared from 13.8percent of world GDP in 1986 to
26.6percent in 2008 on the eve of the Great Recession. After a sharp decline and shortlived rebound, however, the goods trade has been growing more slowly than world GDP
The world is more interconnected than ever. For the first time in history,
in recent years, puzzling economists and business leaders alike. Some of this decline is
emerging
economies
aresuggests
counterparts
ondemand
more and
thanplummeting
half of global
cyclical.
Our analysis
that weak
prices for commodities
account
for nearly
three-quarters
thethe
decline
in trade.
trade flows,
and
South-South
tradeof is
fastest-growing
type of
global economy.
connection.
But trade in both finished and intermediate manufactured goods has also declined, thanks
to several structural forces. The makers of many finished goods are beginning to place less
importance on labor costs and more on speed to market and non-labor costs. As a result,
some production is moving closer to end consumers. Trade is also declining for many
intermediate goods such as chemicals, paper, textile fabrics, and communications and
electrical equipment. This suggests that global value chains may be shortening, at least in
part because of the cost of managing complex, lengthy supply chains.
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In the decade ahead, the global goods trade may continue to decline relative to world GDP.
At a minimum, it is unlikely to resume rapid growth. Not only are factor costs changing, but
3D printing and other technologies also have the potential to transform howand where
GLOBAL DIGITIZATION
Digital platforms are key to this new era of globalization. Over the past two decades, the
largest corporations built their own digital platforms to manage suppliers, connect to
customers, and enable internal communication and data sharing for employees around
the world. But a diverse set of public Internet platforms has emerged to connect anyone,
anywhere. These include operating systems, social networks, digital media platforms,
e-commerce websites, and all kinds of online marketplaces. Their use of automation and
While
of goods
financenew
have
lost momentum,
used to
crossalgorithms drives
the flows
marginal
costsand
of adding
interactions
practically
zero, allowing
border
bandwidth
has
grown
45
times
larger
since
2005.
It
is
projected
the biggest platforms to support hundreds of millions of global users (ExhibitE4). Now users
grow
by another
nine times
in the prices,
next fiveand
years
as digitalchoices.
flows This
can more easilytosee
details
on products,
services,
alternative
of
commerce,
information,
searches,
video,
communication,
and
removes some information asymmetries so that markets function more efficiently, although it
intracompany
traffic
to surge.
can disrupt some
intermediaries
in continue
the process.
Exhibit E4
The biggest online platforms have user bases on par with the populations of the worlds
User
on par with populations of worlds biggest countries
biggestbases
countries
Online platforms1
Countries2
1,590
China
1,372
1,314
India
YouTube
1,000
1,000
650
WeChat
Alibaba
407
400
United States
321
320
Skype
300
Amazon
300
Indonesia
Brazil
256
205
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GLOBAL DIGITIZATION
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GLOBAL DIGITIZATION
Countries cannot afford to shut themselves off from global flows, but narrow export strategies
miss the real value of globalization: the flow of ideas, talent, and inputs that spur innovation
and productivity. Digital globalization makes policy choices even more complex. Value
chains are shifting, new hubs are emerging, and economic activity is being transformed.
This transition creates new openings for countries to carve out profitable roles in the global
economy. Those opportunities will favor locations that build the infrastructure, (Digital
Globalization: The New Era of Global Flows, McKinsey Global Institute, March 2016)
Exhibit E3
Tangible flows
of physical goods
Intangible flows of
data and information
Greater participation by
emerging economies
Innovation flows in
both directions
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GLOBAL DIGITIZATION
Whats the bottom line on these changes [caused by global digitization]? Its
already true that international trade in goods has shifted away from being
about final products, and instead become more a matter of intermediate
products being shipped along a global production chain. Now, information in
all its forms (design, marketing, managerial expertise) is becoming a bigger
share of the final value of many physical products.
Moreover, a wired world will be more able to buy and sell digital products.
New technologies like 3D printing will make it easier to produce many
physical products on-site, wherever they are needed, by shipping only the
necessary software, rather than the product itself. The greater ease and
cheapness of international communication will presumably strengthen many
person-to-person cross-border ties, which is not just a matter of broadening
ones social life, but also means a greater ability to manage business and
economic relationships over a distance.
Its interesting to speculate on how these shifts in globalization, as it
percolates through economies around the world, will affect attitudes about
globalization. Imagine a situation in which globalization is less about big
companies shipping cars and steel and computers, and more about small
and medium companies shipping non-standard products or services.
And imagine a situation in which globalization becomes less faceless,
because it will be so much easier to communicate with those in other
countries - as well as so much more common to visit in person as a student
or tourist. Changes in how globalization manifests itself seems sure to
shake up how economists, and everyone else, view its costs and benefits.
(SeekingAlpha, Timothy Taylor, 03/23/16)
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10
of Things?
INTERNET OF THINGS
Analytics
Analysis
INTERNET OF THINGS
Command/RFI
From a productivity, efficiency, and innovation perspective, we believe the IoT, ultimately, will be as
transformative to society as was the Industrial Revolution, wrote BI Intelligences John Greenough
and Jonathan Camhi. By the end of 2020, we project an installed base of 44 billion IoT devices
worldwide, up from 4.2 billion in 2015. 11.2 billion IoT devices will be installed in enterprise settings,
7.7 billion in government settings, and 5 billion in consumer settings. An estimated $6 trillion will
Four Barriers
Security
concerns
Expanded internet
be spent on IoT solutions
over the next five years, which will
lower
operating costs and increase
Privacy concerns
connectivity
Implementation problems
High mobile adoptionand businesses. BI Intelligence
productivity for governments
projects the $6 trillion investment in
Technological
Low-cost sensors
Large IoT investments
fragmentation
IoT will generate $12.6 return on investment over the next decade.
41%
24
BILLION
30
CAGR total
IoT devices
installed
25
20
15
There will be 24
billion IoT devices
installed by 2020
10
5
$6 TRILLION
INVESTED
System Integration
Amount
Spent
20152020
Data Storage
Security
Connectivity
$0
$1
$2
$3
USD (Trillions)
$14
$12
$8
$6
$4
USD (Trillions)
$10
$13
TRILLION ROI
$2
$0
Compound Investment
2015-2020
three entities
using IoT ecosystems
2016 by Canfield Press, LLC. All rightsThe
reserved.
include businesses, governments and
consumers.
ROI 2015-2025
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11
INTERNET OF THINGS
Today, there are more than 1,211 IoT companies across 22 categories, including IoT city/
infrastructure, home, toys, healthcare, fitness, jewelry, agriculture, trackers and lifestyle and
entertainment. Collectively, Silicon Valley has raised more than $17.4 billion for these IoT startups.
Data monetization is the top IoT revenue driver, but only 8% of businesses are using more than
25% of their IoT data, according to Verizon. The view has been that IoT is a mashup of complex
technologies used only by early adopters, said Mike Lanman, Verizons SVP of IoT and Enterprise
Products. In the past year, weve seen compelling examples of how IoT is being deployed by
a wide-range of enterprises, entrepreneurs, municipalities and developers to address relevant
business, consumer and public needs. Meanwhile, consumers are more willing to try new
technologies and apps that introduce a better way of life. The end result will not only give rise to
thousands of new use cases over the next two years, but will also create an accelerated pipeline for
innovation and a new economy.
Here are the five macrotrends that will dominate the IoT market in the future, according to Verizon:
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12
INTERNET OF THINGS
How will the Internet of Things impact the financial services sector?
The rapidly growing Internet of Things (IoT) is reshaping the worlds economy and impacting the
financial services industry on data security, the use of sensors and big data analysis. Gartner
projects approximately 25.0 billion IoT sensors will be installed by 2020, creating opportunities for
all industries, including banking. Approximately 33% of the sensors deployed today could be used
by the financial services industry, rising to about 50% by 2020, according to Deloitte Center for
Financial Services.
Today, branch-based IoT applications include video tellers and kiosks, where sensing technology
monitors the customer and takes action on his behalf. Mobile geolocation and beacon technology
can introduce the customer as a pre-quing device to improve service.
Real-time data on consumer spending can provide loan underwriters valuable information to
assess risk. Data on the customers residence, including crime statistics, wise use of water and
electricity and exercise regime will help underwriters profile the applicants responsible behavior
and increase the likelihood of a loan approval at more affordable interest rates.
Connected devices will be widely used in the payments space, as monitors trigger the automatic
order and payment for goods, as needed. Ultimately, handheld scanners or mobile phone apps will
be used to scan bar codes of items placed in a grocery basket, allowing the checkout and payment
process to be streamlined. In 2015, Mastercard introduced the Commerce for Every Device
program, which enables any accessory, wearable, automobile or gadget to become a payment
device. As everything becomes connected, customers will have an unlimited number of options on
how to make payments, as the devices begin to work together seamlessly over time. Technology
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13
INTERNET OF THINGS
that allows Internet connected cars to make payments is expected to be rolled out in 2016, after
which it will be expanded to markets in other parts of the world. For the IoT to reach its full potential
in the financial services industry, establishing identity for the devices and ensuring the devices
cybersecurity will be essential. Over the next decade, the way a consumer views financial services
and how his identity is connected to an account will be completely disrupted.
The insurance industry has begun to use sensor to improve customer communication and expedite
insurance claims. Wireless communication from the automobiles computer is helping insurers
collect and analyze behavior data to better assess risk and allow customers to pay on a behavior
e.g., usebasis rather than flat annual premium. Sensors can be used to monitor clients health,
track carbon monoxide levels in the home, monitor water leaks or firesall potentially lowering
insurance premiums and improving the efficiency of the insurance industry and lowering costs to
consumers.
Theres no question that the Internet of Things has a dramatic effect on the way financial services
companies will collect data, how they operate and how they interact with customers, wrote futurist
Richard van Hooijdonk. Succeeding in this era depends on how well these new technologies
are deployed. While the IoT offers new opportunities, it also has the potential to disrupt the
marketplace. It will facilitate the development of new business models and new competitors. In
order for the financial services industry, or any industry for that matter, to yield value from the
Internet of Things, we need to adapt, rethink and address factors such as privacy concerns and
cyber security.
By enabling the collection and exchange of information from objects, the IoT has the potential
to be as broadly transformational to the financial services industry as the Internet itself, said Jim
Eckenrode, executive director of the Deloitte Center for Financial Services
Within the next 10 years, well launch almost 100 billion IoT devices onto the worlds stage, said
Brett King, CEO of Moven. Whether an autonomous, self-driving car driving for Uber, a smart
fridge that orders your groceries, a solar-powered car recharging station that requests a payment
or your automated assistant on your smart device booking your airline or movie tickets, the vast
majority of payment and financial transactions around the globe will be fully automated within a
decade. [T]hese are transactions that dont involve a plastic card, NFC chip or checkbook, and
these are accounts that you wont find listed on the website of a retail bank. The Internet of Things
means the way we think about bank products and services and how we marry an identity with an
account is going to be completely undermined over the next decade. Regulators and bankers
better get ready for a new reality.
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14
INTERNET OF THINGS
The adoption of this revolutionary technology will reverberate throughout the U.S. economy,
dramatically impacting:
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15
INTERNET OF THINGS
In its 2015 10-K filing with the SEC, Allstate Insurance warns that automous cars could disrupt their
business model. The company wrote:
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16
INTERNET OF THINGS
Most of what we buy bubble gum, blouses, books, baseballs is destined to last days,
weeks, maybe years. But we think of houses as investments rather than consumable goods
because houses last decades or centuries. Over that time, what makes a house valuable
doesnt change much: well always like plenty of square footage, views, and mostly prefer
living in cities with nearby restaurants, train stations and jobs.
And we love parking. Where we live, work and even eat is shaped by where we can park
our cars. A car has been the pet that Americans insist on accommodating, in numbers ten
times higher than modern parts of Asia like Hong Kong.
But now a change is at hand. Tesla CEO Elon Musk predicts that cars will drive themselves
in two years. Chris Urmson at Google estimates it will take five years. Already Lyft and
Uber have shifted millennials home-buying preferences: who needs a garage, or for that
matter a kitchen or a living room, when transportation, food and even a social life are all
available online and on-demand? This is why, even as urban home prices boom, we see
couples with one car or no cars preferring smaller homes with fewer amenities but a high
Walk Score and nearby transit.
In our lifetimes, and the lifetimes of our mortgages, the self-driving car could change the
shape of the American city even more profoundly. Unlike the cars of today, which are
parked 96% of the time, self-driving cars will be in semi-continuous service except in the
wee hours; well need far fewer cars overall, and those that remain will leave town at night.
A third of urban real estate is devoted to parking garages that could become parks;
there are eight U.S. parking spaces for every car in operation, for as many as two billion
U.S. spaces overall. Thirteen percent of every lot for a typical single-family home is now
dedicated to a garage that could be converted into an office or a mother-in-law apartment;
with the income provided by AirBnB and other property-rental sites, single-family homes
could thus become 13% more affordable. Perhaps a decade from now, architects and
contractors may offer fixed-fee garage-conversion services, in much the same way that old
houses were once converted en masse to use modern furnaces and plumbing.
Self-driving cars will also change homebuyers location preferences. Data from Lyft and
Uber already show that when private transit becomes significantly cheaper, public-transit
use also increases: many carless households replace the car with a mix of private and
public transit. As cars become a service rather than an asset, proximity to bus lines may
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17
INTERNET OF THINGS
become less important, but subways and trains that can bypass car traffic altogether will
only grow in popularity.
How should this affect your home-buying decisions today? Perhaps not much; the average
lifespan of a car is 15 years, so it may be 2035 or later before nearly all cars are selfdriving. And well still need at least some parking, not to mention a place for our skis and
lawn-mower.
But our guess is that the future, which usually doesnt come to pass at an even pace,
will happen faster than that; there will be a tipping point, driven in this case by the
overwhelming convenience and safety of self-driving cars, and by the likelihood that only a
small proportion of cars need to be self-driving before real estate prices begin to anticipate
a world where most cars are that way.
Regardless of when you want to prepare for the future, heres our take on what to do about
it:
Dont pay a premium for a garage. Today the same home with or
without a garage costs an extra $50,000 per parking space. A decade
from now self-driving cars will make urban homes with less parking
more attractive.
Do pay a premium for proximity to a subway station or rail station.
Today proximity to transit adds 30% to a homes value. As the number
of partially or completely carless households increases, we believe that
premium will be closer to 50% in a decade.
And last but not least, consider the possibility that a home next to an
unsightly parking garage may one day be situated next to a new park
or a new block of coffee shops and restaurants.
A hundred years ago, the car was the reason that cities became something entirely
different than villages, with sprawl, painful commutes and gated communities. Now the selfdriving car may bring the old idea of a village back to the future. (LinkedIn, Glenn Kelman,
03/30/16)
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18
DIGITAL BANKING
DIGITAL BANKING
The epicenter of disruption: FinTech
The digital revolution in banking has just begun. Today, the industry is in phase one of
this evolution, offering customers high quality web and mobile sites and apps. New digital
technologies are reshaping the value proposition of existing financial products and services,
placing up to 28% of banking and payments business and 22% of insurance, asset management
and wealth management services at risk to disintermediation, according to PwC.
1.1 Disruption targets mostly
consumer banking and payments
80%
70%
60%
Insurance/Reinsurance
50%
30%
20%
10%
0%
Consumer
banking
Investment
& wealth
management
SME banking
Brokerage
services
Property
& casualty
insurance/
Life insurance
Commercial
banking
Insurance
intermediary
Market
operators &
exchanges
Fund
operators
Investment
banking
Reinsurance
Although a high level of disruption triggered by FinTech is already beginning to reshape the
nature of lending and payment practices, a second wave of disruption is making inroads in
the asset management and insurance sectors, wrote PwC. Annual investments in InsurTech
start-ups has increased fivefold over the past three years, with cumulative funding of InsurTechs
reaching $3.4bn since 2010, based on companies followed in our DeNovo platform. The pace
of change in the global insurance industry is accelerating more quickly than could have been
envisaged. The industry is at a pivotal juncture as it grapples with changing customer behavior,
new technologies and new distribution and business models [including self-directed services,
usage-based insurance, and remote data capture and analytics to evaluate risk etc.). The
investment industry is also being pulled into the vortex of vast technological developments.
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19
DIGITAL BANKING
optimization technology. Just as Enterprise Resource Planning (ERP) software allowed functions
and entities within a business to optimize business processes by sharing data and logic within the
enterprise, blockchain will allow entire industries to optimize business processes further by sharing
data between businesses that have different or competing economic objectives. That said, although
the technology shows a lot of promise, several challenges and barriers to adoption remain.
Further, a deep understanding of blockchain and its commercial implications requires knowledge
that intersects various disparate fields and this leads to some uncertainty regarding its potential
applications.
In our view, blockchain technology may result in a radically different competitive future in the
[financial services] industry, where current profit pools are disrupted and redistributed toward the
owners of new, highly efficient blockchain platforms. Not only could there be huge cost savings
through its use in back-office operations but also large gains in transparency that could be very
positive from an audit and regulatory point of view. One particular hot topic is that of smart
contracts contracts that are translated into computer programs and, as such, have the ability to
be self-executing and self-maintaining. This area is just starting to be explored, but its potential for
automating and speeding up manual and costly processes is huge.
Innovation from start-ups in this space is frenetic, with the pace of change so rapid that by the
time print materials go to press they could already be out of date. To put this in perspective, PwCs
Global Blockchain Team has identified more than 700 companies entering this arena. Among them,
150 are worthy to be tracked and 25 will likely emerge as leaders. Distributed ledger technologies
offer FS institutions a once-in-a-generation opportunity to transform the industry to their benefit, or
not.
FinTech companies are not just bringing concrete solutions to a morphing consumer base, they
are also empowering customers by providing new services which can be delivered with the use of
technological applications. The rise of digital finance allows consumers to connect to information
anywhere at any time, and digital services can address their needs in a more convenient way than
traditional nine-to-five financial advisors can.
The main impact of FinTech will be the surge of new FS business models, which will create
challenges for both regulators and market players. FS firms should turn away from trying to control
all parts of their value chain and customer experience through traditional business models, and
instead move toward the center of the FinTech ecosystem by leveraging their trusted relationships
with customers and their extensive access to client data. FS players might not recognise the
financial industry in the future, but they will be in the center of it. (Blurred lines: How FinTech is
Shaping Financial Services, PwC, March 2016)
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20
DIGITAL BANKING
26 has signed up 160,000 customers and expects to attract 240,000 new customers in 2016
making it the fastest growing bank in Germany. This startup has rebundled financial services
for its customer by forming strategic partnership with other FinTechs, including Barzahlen and
Transferwise.
Number26 is well on its way to creating a borderless bank in Europe, reaching
Exhibit
1
customers in France, Greece, Ireland, Italy, Slovakia and Spain, and becoming an essential
IT costs,
USD million
100120
2545
3545
1520
2025
Traditional
Digital
Opex
Traditional
20
~5
~15
Digital
In a Business Insider interview, Number26 CEO and cofounder Valentin Stalf described how his
bank differs from traditional financial institutions:
Sixsuccessfactorstobuilddigital-banking
businesses
What weve been doing is banking as it should be in 2015 and 2016. We try to reimagine
how a bank should work and we tried to build something that is like using Uber or Spotify or
any of these apps you love to use. We said first it should be mobile and secondly, if you use
Basedonourexperiencehelpingmorethan20institutionsevaluate,design,and
thatbankswillneedtoaddresstoensureaquickandsuccessfullaunch.
Also, weve spent a lot of time on how can you be more efficient in building or doing
banking in general. If you look at a traditional bank theyve got a big branch network and
1.Focusonwheretherealvalueis
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21
DIGITAL BANKING
theyre using technology out of the 1980s. We tried to make a backbone, together with the
app that we have, that is much superior to the traditional banks and give you a product at
a free price for the base account and then be much superior in the things we build around
that.
We started with a fairly niche productan account and a card. Now weve gone from
there to a FinTech hub around that where we try to leverage the innovation If you do an
international transfer, it doesnt have to be done like it has been done 30 years ago. Maybe
it can be done through TransferWise. Weve integrated with TransferWise so you can use
it but you dont have to leave the app. Were doing that for savings and investment. Were
planning to do that for consumer credit products in the future.
I dont believe in having three different appsone for credit, one for savings, one for
managing your cards. I think you should have everything you want in one app and get
everything that you need with one click. It makes more sense to build a marketplace the
FinTech hub and lets everyone buy things in one place
Im a strong believer that if you have the best product, obviously you will be superior in
winning customers. We have lower overheads and better engagement with our user, giving
us lower customer acquisition costs, and we have the better offers on the platform in the
future.
I personally think that in the long run the better products will survive. Maybe in the
beginning it will be early adopters but still. Today there is no reason to sign up to an
account that is more expensive and has a worse app.
Today we are the fastest growing retail banking product in Germany, with competition that
puts more than 50 million in marketing every year. I think the time is right now that people
are moving away.
Maybe we dont have to get the non-digital natives. Maybe we start with the digital
nativesthere are around 60 million in Europe. If we win 6 million out of that, 10%, I think
its going to be pretty successful.
Obviously were not going to replace Deutsche Bank but the question is where are the
future customers? Are they with us or are they with Deutsche Bank? (Business Insider,
Oscar Williams-Grut, 04/06/16; Building a Digital-Banking Busines, Sonia Barquin and
Vinayak HV, April 2016)
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22
DIGITAL BANKING
$850 billion
1.1%
5%
10%
17%
Total banking
consumer revenue
Revenue impact from
digital disruption
Source: Citi Digital Strategy
2015
2017
2020
2023
UK
$1.8 billion in 2010 to $19 billion in 2015 with over 70% of this investment focusing on the
last mile of user experience [e.g., at the point of sale] in the consumer space, they continued.
Although FinTech companies have China
the advantage of new innovation, incumbent financial
institutions still have the upper hand in terms of scale and we have not yet reached the tipping
$5.4
billion
point of digital disruption in either the US or Europe. Given the growth in FinTech investment,
this
$16.6
billion
isnt likelyChina
to continue
is currentlyfor
the long.
biggest Peer-to-Peer (P2P)
lender in the world
Source: Citi Research
$66.9
banking space, which accounts for about 50% of the industrys profit pool and a higher proportion
Global
2018
$1,700
billion
$3,000
billion
$672
billion
$1,600
billion
China
2015
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23
DIGITAL BANKING
Insurance
10%
Large
Investment
Corporate
Banking
3%
4%
Insurance
10%
Savings &
Wealth
10%
Equity
Digital Currency Crowdfunding
3%
2%
Institutional
Tools
3%
Asset
Management &
Wealth
10%
12
Payment
March 2016
23%
Lending
46%
Money Transfer
3%
[FinTech]
willDutch
compel
banks
to
automate
their
business
and that the number of
Nordic and
banks
have
cutsignificantly
total branchPoint
levels
by
50%
from recent
At the
Tipping
inaround
the
West
peak levels.
Wepeople
believe may
that from
2013by
levels
(the lastas
reported
branch/population
branches
and
decline
as much
50% over
the next years, said Barclays CEO
from the World Bank), developed
banks could
branch
numbers
by of the current consumer banking
In the USmarket
and Europe,
onlycut
a very
small
fraction
Only a small fraction ofdata
the consumer
Antony
Jenkins.
Citi
analysts
project
that
the
number
of
bank
branches
will decline another
another
30-50%.
operating
in thedisrupted
developed by
market
with the
wallet
has been
FinTech
so lowest
far. However, this is likely to rise. Greg
banking wallet has been
disrupted
so farDNB,
in already
30% to 50% in developedBaxter,
markets,
largely
driven
byofmobile
banking,
increased
FinTech
ratio, announced
in
late
2015
that
theyInternet
will further
Citi's
Global
Head
Digital
Strategy,
notes that
we are not
even at "the end
the US and Europe branch penetration/population
halve their branch
in revenue
2016. Theand
US banks
have upgrowthparticularly
to now lagged their
competition,
and network
sluggish
profitability
in
a
low
interest
rate and the US.
of the beginning" of the consumer disruption cycle in Western Europe
Nordic and European peers on branch reductions. But with the increased ubiquity of
environment.
Greg's
team
estimates
that
currently
only about
the mobile Internet, increasing
FinTech
competition,
and
a sluggish
revenue
and 1% of North American consumer
revenue
migrated
newindigital
profitability environment, webanking
expect US
banks tohas
follow
their EU to
peers
cutting business models (either at new
entrants or incumbents) but that this will increase to about 10% by 2020 and 17%
branches.
by 2023.
We are in the PER
early stages
the US andBY
European
consumer banking
COMMERCIAL BANK
BRANCHES
100kofADULTS
REGION
Figure 10. Commercial Bank Branches
per 100k
Adultstherefore
By Region we note that this estimate is subject to considerable
disruption
cycle,
40
35
30
25
-33%
20
-45%
15
10
-50%
5
-
2016 Citigroup
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2018 2020
Euro area
East Asia & Pacific (all income levels)
Nordics
2025
United States
Latin America & Caribbean (all income levels)
www.canfieldpress.com
As noted by Jonathan Larsen, Global Head of Retail and Mortgages at Citi, the
24
The future of the branch is about advisory and consultation rather than transaction.
The return on having a physical network is diminishing. Branches and associated
MARCH / APRIL 2016
staff costs make up about 65% of the total retail cost base of a larger bank and a lot
of these costs can be removed via automation. The pace of staff reduction so far
has been gradual (~2% per year or ~11-13% from peak levels per-crisis). We
believe that there could be another ~30% reduction in staff during 2015-2025,
shifting from the recent 2% per year decline to 3% per year, mainly from retail
Citi
expects
the banking
industry
will reduce
staff
an additional
30%result
between
banking
automation.
From
peak staffing
levels
pre-crisis,
this would
in a 2015
40- and 2025. If
45%
decline,system
not farinoffEurope,
from Antony
Jenkins'
the
banking
Japan,
and theforecast.
US operated with the same cost/income ratio as
the best-in-class Nordic region, it would remove $175 billion from their cost base (or 23%) and add
For countries that have gone through more severe financial crisis and consolidation
39% to the pre-tax profit of the banks in 2016, wrote the Citi analysts.
such as Greece, Ireland, and Denmark, recent full time employee (FTE) reduction
ranges between 3%-5% per year. Low interest rates and increased automation are
catalysts for faster full-time employee (FTE) reduction.
4.00
3.00
3.26
-40%
2.93
2.89
2.57
1.82
1.80
2.00
-45%
1.00
0.00
US
Europe
Peak
2015
2025
Source: ECB, United States Bureau of Labor Statistics, Citi Research estimates
We are
at anmobile
inflection
pointand
for retail
bankingrevolution
driven by has
automation
The
recent
Internet
smartphone
created and
a game changer in consumer
digitalization. As banks reduce the number of branches, naturally the number of
and SME finance and payments, wrote the analysts. Smartphones in the US and Europe are
transaction based employees such as branch tellers will decline. In the US, the
increasingly
part tellers
of the is
SME
and micro-enterprise
payment
Square
number of bank
already
down 15% from the
peak inspace
2007.(e.g.
As we
notedor
iniZettle). Apple
Pay
and
Android
Pay
debuted
in
2014
and
2015
respectively
and
allow
consumers
the Branch of the Future section (see page 71) in a branch heavy retail bank aroundto make
65% of banks
staff aretablets
doing processing
that could
be automated
in thepayment
long
payments
via phones,
or watches.work
The original
mobile
device based
service,
term. In the
coming in
years,
theasrecent
trend
branch teller staff reduction should
M-PESA,
launched
Kenya
far back
as of
2007.
accelerate (e.g. in the US go up from the 2 percentage point reduction per year
since 2007).
Technology does not just change distribution models and service patterns. It is not just a question
of fewer branches and more apps The definition of financial products themselves may need to
be rethought. John Stumpf, Wells Fargo CEO, noted in late 2015:
Well probably be the last generation to use the term credit card and debit
card. It will probably be debit access and credit access and it will be likely
2016 Citigroup
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25
DIGITAL BANKING
Looking to the long term, the new generation of technology could generate cost
savings as well as extra investment spend. So far a lot of payments innovation has
been focused on the last mile, i.e., the user experience at the point of MARCH
sale. The / APRIL 2016
existing payment infrastructure remains the backbone. But Blockchain technology
could be different. It could replace the current payment rail of centralised clearing
with a distributed ledger for many aspects of financial services, especially in the
B2B world.
[Blockchain
technology]could
replaceitsthe
[banking industrys]
current
payment rail of centralized
Blockchain positives
are based around
characteristics,
including
decentralization,
programmability,
and immutability.
could aspects
also be aofcatalyst
forservices,
the transformation
clearing
with a distributed
ledger forIt many
financial
especially in the B2B
of manywrote
existing
systems
that operate
with a high
degreearound
of robustness
but
world,
the legacy
Citi analysts.
Blockchain
positives
are based
its characteristics
including
may not be the most cost or capital efficient way of doing business. However, there
decentralization, programmability, and immutability. It could also be a catalyst for the transformation
are also considerable negatives associated with the technology, not least that it is
of
many existing
legacyedge"
systems
operate
with a high
robustness
but may not be the
currently
still "bleeding
andthat
lacks
the robustness
of degree
existingofpayment
systems
most
cost
or
capital
efficient
way
of
doing
business.
such as Visa or SWIFT. But even if Blockchain does not end up replacing the core
current financial infrastructure, it may be a catalyst to rethink and re-engineer legacy
systems that could work more efficiently.
Negatives (-)
What Is Blockchain?
However, there are also considerable negatives associated with the technology, not least of which
is
that it is currently
still bleeding
andthat
lacks
the arobustness
of existing
systems
Blockchain
is a distributed
ledger edge
database
uses
cryptographic
networkpayment
to
provide
single
source of
truth.
allows
untrusting
parties
with common
such
as a
Visa
or SWIFT.
But
evenBlockchain
if Blockchain
does
not end up
replacing
the core current financial
interests to co-create
a permanent,
and transparent
of that could work more
infrastructure,
it may be
a catalyst tounchangeable,
rethink and re-engineer
legacyrecord
systems
exchange and processing without relying on a central authority. In contrast to
efficiently.
traditional payment model where a central clearing is required to transfer money
between the sender and the recipient, Blockchain relies on a distributed ledger and
consensus of the network of processors, i.e. a super majority is required by the
If the Internet is a disruptive platform designed to facilitate the dissemination of information,
servers for a transfer to take place.
then Blockchain technology is a disruptive platform designed to facilitate the exchange of value.
Blockchain has a few clear advantages relative to the current system. First of all, it disintermediates
the middleman. It enables direct transfer of digital assets without the need for an intermediary.
Moreover, since no middleman is required, a Blockchain system has the likely benefit of fast and
low cost settlement. Another promising innovation that leverages the Blockchain is smart contracts
and tokenization. Smart contracts automate and execute pre-agreed conditions once they are met.
2016 Citigroup
And lastly, Blockchain provides irrefutable proof of existence, an important feature to maintain an
audit trail that tracks the ownership of the valuable asset being transferredthis is crucial from a
business and a regulatory perspective.
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26
DIGITAL BANKING
Disintermediation
Automation
Certainty
Faster settlement on a
relatively cost effective and
efficient network
Programmability enables
automation of capabilities
on the ledger (e.g. smart
contracts)
Source: Citi
March 2016
Blockchain technology could be applied more broadly than crypto-currencies. In the currency
2016 Citigroup
91
space, the Bitcoin rail could be used to facilitate cross border payments or supply chain and
trade finance. Because virtually any type of information can be digitized and placed onto
Blockchain, theoretically
any information
of value could be transferred in the Blockchain world.
Blockchain
Use Cases
The programmability
of Blockchain makes it suitable for smart contracts: a contract that executes
Blockchain technology could be applied more broadly than crypto-currencies. In the
currency space,
the Bitcoin
rail could could
be usedalso
to facilitate
crossfor
border
or
once pre-agreed conditions
are met.
Blockchain
be used
datapayments
management
such as
supply chain and trade finance. Because virtually any type of information can be
digitized and placed onto Blockchain, theoretically any information of value could be
part of Blockchain adoption,
especially
as an
ecosystem
needs toof be
developed
transferred in
the Blockchain
world.
The programmability
Blockchain
makesfor
it the
suitable for smart contracts: a contract that executes once pre-agreed conditions
of the new system. The technology is not industrial grade yet in the view of many in the
are met. Blockchain could also be used for data management such as identity
industry.
management. Determining the optimal Blockchain use case is often the most
challenging part of Blockchain adoption, especially as an ecosystem needs to be
developed for the adoption of the new system. The technology is not industrial
grade yet in the view of many in the banking industry.
identity management. Determining the optimal Blockchain use case is often the most challenging
adoption
banking
27
DIGITAL BANKING
Apart from faster processing times and lower borrowing costs (due to branchless model), P2P
lenders help service customer segments that are not ordinarily viable for banks, wrote the
analysts. :On the other hand, lenders enjoy higher returns vs. other traditional bank products and
have the opportunity to diversify their investments (as a single lender can choose to invest in
multiple projects, thereby funding only a part of the whole project and diversifying his risk).
Prominent P2P platforms in the West are Lending Club and Prosper in the US and Zopa in
the UK. They currently account for a miniscule share in the total credit pie (<1% of US and UK
consumer lending), but theyve been growing exponentiallyLending Club and Prosper originated
loans of over $8 billion in 2015 alone.
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DIGITAL BANKING
The addressable market for P2P lending potentially includes revolving credit card loans, student
loans, and loans to small and medium businesses. We estimate in the US, this market totals
$3.2 trillion, of which $1.3 trillion is held by commercial banks and the rest by non-bank financial
institutions. Citi analyst Mark May estimates the target market for Lending Club and its peers is
about $254 billionaround 8% of total addressable US total consumer credit market.
Given the growth and outlook for the online alternative lending sector, there are a large number
of companies and significant venture capital invested in this space. While there are increasing
institutional money seeking P2P as an alternative asset class, which provide valuable liquid
funding for the platforms, the long-term success of the companies would increasingly be based on
the efficacy of a companys marketing and branding.
The marketplace lenders have only been around for a decade. They are currently benefitting
from a record low interest rate environment that resulted in lenders/investors in search of yield
and drawn them to its marketplace. The borrowers are also enjoying the lower debt servicing cost
in a low rate environment. But the business model is yet to be tested against interest rates and
credit cycles. There is concern that higher rates resulting from Fed tightening could negatively
impact business models levered to consumer credit such as Lending Club. The Fed rate hike in
December 2015 already resulted in a correction in the share price of US P2P lenders.
As it stands currently, the alternative lending space has generally avoided falling subject to
restrictive regulation that would impede alternative lending business models. That said, it is
difficult to rule out increased regulatory burden for Lending Club and similar business models,
especially if the asset class was to exhibit meaningful underperformance or sizeable defaults. We
think likely impacts of increased legislation could include: (1) risk retention requirements, similar
to those made of sponsors of asset-backed securities under Dodd-Frank; (2) minimum capital
requirements to help alternative lending platforms withstand financial shocks, which are required
in the UK; and (3) heightened disclosure and reporting requirements that could become more
burdensome and expensive. (Digital Disruption, Citi GPS: Global Perspectives & Solutions, March
2016; American Banker, Kevin Wack, 04/08/16)
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DIGITAL BANKING
Its very tough because they have these old proprietary systems and every time we would go
through [a discussion]can we just replace them? Its billions of dollars, huge risks, client data.
And every time you look at ityou know whatwe cant make it work. Its getting to the point
where we have like six guys, who understand the programming on the core code. Im not kidding
Im not kidding. When I was at one of the banks, they were worried about them dyingliterally
worried about them dying.
Youre starting to hear some things that are not just changing around the marginsits like a
radical rethinking of the banking business, said Bloombergs Michael Moore. Theres been talk that
some banks are going to have the client relationships and theyre going to do that solely through
tech and some [banks] are just going to be balance sheets that other banks rent. Theyll just be
these pools of capital that dont have any interaction with the ultimate client. And thats a major shift
in the way that people are thinking about how banks work [in the future]. (Bloomberg Surveillance,
04/04/16)
If you look at the banking business over decades, it has always been a huge
user of new technologies. This has been going on my entire career, though
it does appear to be accelerating and coming at us from many different
angles. While many FinTech firms are good at utilizing new technologies, we
should recognize that they are very good at analyzing and fixing business
problems and improving the customer experience (i.e., reducing pain
points). Sometimes they find a way to provide these services more efficiently
and in a less costly manner; for example, cloud services. And sometimes
these services are not less expensive but provide a faster and simplified
experience that customers value and are willing to pay for. You see this in
some FinTech lending and payment services.
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30
DIGITAL BANKING
[At JPMorgan Chase,] we use technology to make it cheaper, better, and faster for the
client. And then if you have the most flow, you can win. Now, having said that, Silicon
Valley wants to take on this business. They think they see an opening. Other Internet
companies such as Amazon, which have large user bases, may also want to monetize
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31
DIGITAL BANKING
their user data to grow into the lending business. Many payment companies are growing
consumer and SME lending.
Lets look at lending, where theyre using big data for the credit side. And its just credit
data enhanced, by the way, which we do, too. Its nothing mystical. But theyre very good
at reducing the pain points. They can underwrite it quicker usingIm just going to call it
big data, for lack of a better term: Why does it take two weeks? Why cant you do it in 15
minutes?
For example, they might lend to one of our customers whos got a $200,000 JPMorgan
Chase loan, and this person wants to get another $20,000 for a new truck or a piece of
equipment. And what does he do? He goes with them, because he gets it in 15 minutes. If
he goes back to the bank, he may have to go through this whole big long process for that
$20,000.
Can we do something like that? Of course we can. Ive asked our people, Why dont we
just put a revolver on top of our basic loan? Make it easier for the client.
If you ask me, the biggest risk will be in the payment systems. I think the banks are pretty
good at using digital technology to make it easier for customers. We have 23million
customers who bank on their phones now. It will be a challenge for anyone to be better,
faster, cheaper than us. But some people think branchless banks can compete, and that
can prove true in some cases.
For the most part I think those things [e.g., equity, debt, deposit accounts, et cetera] will
still be taking place in the banking system, although some will maybe move on. Im hoping
not the main payment systems and deposit businesses, but its possible someone comes
up with something great.
One of the issues with some of these [FinTech] lenders is going to be, where will their
provider of credit be when theres a crisis? Thats why some of these smarter services,
to support their operations, are courting more permanent capital. They want a source of
longer-term funding that can survive a crisis.
[I]f they become big and significant, theyre going to be regulated, too, eventually. The
government isnt going to say, Were going to regulate banks, but well leave these other
companies alone. I think the regulators want to make sure that they have some form of
regulation on anything systemic. We like our hand. But, you know, honestly, who owns
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32
DIGITAL BANKING
the future? Just because you have a good hand today doesnt mean its good tomorrow.
And some of the things were doing may become very disadvantageous at some point.
(Bloomberg Markets, John Micklethwait, 03/01/16)
Technology is upending established workflows and processes in the financial services industry.
Tasks once handled with paper money, bulky computers, and human interaction now are being
completed entirely via digital interfaces, wrote BI Intelligences Evan Bakker. Given how
pervasive financial services are across the globe, the disruption opportunity for FinTech startups
is massive. Startups, some of which have garnered blockbuster investments, are re-imagining
almost every type of financial activity. Meanwhile, the old guard is trying to solve the puzzle the
FinTech revolution presentshow can incumbents benefit from the rise of digital, and how can
they avoid obsolescence? (The FinTech Ecosystem Report, Evan Bakker, 12/17/16)
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33