James Alexander, Directors of Future Agenda
Ecuador’s financial turning point
On March 8, 1999, Ecuadorians awoke to the news that the country’s banks were closed. Fueled by a liquidity crisis, the “bank holiday” lasted five days and became part of wider plans to save the country’s private-banking system. This “rescue” came at a cost. Despite government bailouts, 16 banks closed, including the two largest, and many Ecuadorians saw their savings wiped out. The crisis led to the country abandoning its own currency in favour of the US dollar in January 2000 and to massive unemployment.
A 2007 commission set up to investigate what had happened found that the irresponsible behaviour of some of the banks was facilitated by state policies and specifically a law from 1998 that enabled the government to guarantee all deposits and absolve banks from maintaining sufficient liquidity. The commission attributed the favouring of the banks’ interests over the people’s to the close relationship between politicians of the day and the heads of some private banks.
Ecuador’s banking system was not alone in its dysfunction. While the catalyst was different, it arguably took until the 2007-08 global financial crisis for the rest of the world to catch up.
Banking on foresight this time.
Time heals, and lessons have been learned; so today in 2017, the Ecuadorian banking system has more than stabilised, and it is now confidently looking to the future. Asobanca, the banking association of Ecuador, is at the vanguard of this. In July 2017, it invited Future Agenda to work with leaders from the financial sector to co-develop a forward-looking perspective on banking in Ecuador and from that to identify a series of actions to take to help accelerate positive progress. The discussions took place at the IDE Business School in Quito.
Building on insights from Future Agenda’s wider global foresight programme, delegates identified four core thematic shifts for the next decade. Each shift was underpinned by a number of supporting insights.
Shift 1: Enhanced Experience
Powered by technology, data and the crowd, services become better, easier to use, more efficient and centred on individual users. Leaders broaden their service offer as they shift from product profitability to customer value and experience.
Better access to and analysis of smart data enables deeper understanding and insight of individual customers, their preferences and their needs. In short, our understanding of what constitutes customer value improves, shifting banks’ primary focus from internal-product and channel-profitability measures to external customer-value and experience measures. This unlocks a more customised and customer-centric delivery across all elements of the customer experience (i.e., product, services and communication).
Adjacently, banks become empowered and regain legitimacy by listening to the crowd. Faster response to both individual and collective needs enables rapid service improvement and the emergence of entirely new business models, including some developed outside the sector that are capable of breaking old monopolies. For example, power over data shifts from the organization to the individual with new disruptive providers, seeking to put the individual in control of his or her personal data and experience, disintermediating data-intensive businesses. While smart data insight and digital delivery becomes mission critical, it is not a panacea. As service provision and consumption becomes ever more digital, automated and algorithmic, those brands that can also offer more emotional engagement and human-to-human interaction become increasingly attractive. Indeed, the human touch itself becomes a point of differentiation.
Shift 2: Enabling Environment
Innovation and disruption demands a cultural and operational response to release inertia and create an enabling environment for all participants.
Despite the change in approach, confidence in large organisations and institutions continues to decline. To address this, banks and the banking system seek to build public trust by becoming more transparent, inclusive, decentralized and accountable. Rather than the formal rigid structures of traditional banking, a flatter, project-based, collaborative way of working becomes the norm. Like it or not, existing leadership, structures, processes and systems adapt to this approach and, in so doing, create new banking models—the open door to innovative ideas and a new breed of banker inherently more customer centric, technologically savvy and entrepreneurial.
Banks are challenged as they adjust from closed, vertically integrated monoliths to providing more open-banking services. Coincident to this, the traditional banking philosophy of “safety at all costs” evolves to present a more proactive, customer-focused approach. While continuing to ensure the integrity of the banking system, regulators seek to more rapidly harness innovation that delivers more value to society and better experiences for customers. “How can we safely…?” is the question of the day. This enabling environment also requires the support of consumers, demanding and using innovative products and services. Millennials, who currently account for 34 percent of the population in Ecuador, will likely be at the forefront in challenging tradition and familiarity with existing services.
Shift 3: Digitally Disrupted
Increased digital-services provision and connectivity create new opportunities for services provision and disruption. With it come new challenges.
Digital technology delivers all sorts of opportunities, most obviously in the proliferation of digital money. Convenient and secure for consumers, with lower transaction costs for businesses and greater transparency for regulators, it gradually replaces cash as the most popular form of currency and facilitates the growth in low value (typically sub $10 transactions) and high-frequency payments—both areas that are likely to see significant transformation. Real-time transparency allows better purchasing at the same time as margins and yields are automatically enhanced. As the algorithms of Amazon and Uber cross over to affect a wide variety of businesses, from the provision of energy to buying parking and train tickets, many expect the widespread adoption of dynamic pricing to be truly transformative.
One of the consequences of the digital transformation is that although banks improve their services, they lose their stranglehold over the customer relationship and, more importantly, over customer data. In addition, increasing competition combined with changing regulations, increased automation and innovations such as blockchain will mean that the current value chain will spread out, removing intermediaries and reducing costs. Although banks find it difficult to adjust from the closed, vertically integrated monoliths of the past to being able to provide more open and accessible banking services, these changes are hugely beneficial for consumers and suppliers, increasing accessibility and efficiency. That said, of course, the growth in the intelligence and capabilities of machines presents both a threat and an opportunity. Greater automation frees up time but also has the potential to threaten more jobs in managerial or administrative roles. Greater digitisation also means that new vulnerabilities emerge. The consolidation of identity and payments into an ecosystem that includes crypto-currencies is a potential goldmine for the cyber-thief keen to seek and exploit weaknesses.
Shift 4: Connected Success
As challenges to society increase, achieving lasting, inclusive growth requires a shift in the definition of success, more collaboration and a better balance between short- and long-term gains.
There is a gradual acknowledgement that the present system is biased against the poor and the vulnerable. Although significant progress has been made, to date positive change has limited reach. Millions of people continue to be left behind from mainstream progress—especially the young, the poor and those who are disadvantaged.
One way of addressing this problem is by improving access to finance. Technology can help here, not only by providing the necessary connectivity but also by, for example, implementing predicative algorithms that protect consumers from falling into unnecessary debt. Changes are primarily driven by the payments industry, which has recognized the potential upside of a more financially literate population. However, access to finance is not enough; the need to provide financial education is also acknowledged in order to give those at the bottom of the pyramid the opportunities that richer members of society take for granted.
Interestingly, banks struggle to keep up with the changes. It is difficult for them to digitise legacy systems and to lower their cost bases to effectively compete with more nimble fintech players. As a result, they seek to build partnerships to remain competitive, create new value and assist with bridging the gap.
Accelerating progress today.
As ever with foresight, this work is not about prediction. It is about anticipation. It aims to help leaders become better informed about the future so that they can as a result make more thoughtful strategic decisions and/or place smarter innovation bets.
In order to accelerate and drive forward progress on this agenda in Ecuador and beyond in the short-term, the banking leaders identified five core actions that are now being developed in more detail:
Be inclusive and involve all stakeholders in building a future vision (e.g., including consumers, regulators and banking-service providers).
Create a powerful narrative and demand for change to support the desired evolution.
Demonstrate commitment to and progress on financial inclusion.
Build FinLab, Ecuador’s banking accelerator, as a beacon of change and collaboration between fintechs and existing participants.
Pursue and deliver one quick win in the next 12 months to demonstrate positive change.
With a new government and regulator now in place, and with Asobanca providing vision, collaboration and impetus, it may well be that Ecuador is set to lead the world again, albeit this time in a more positive direction for consumers, the country and the banking sector.