Digital disruption in financial institutions

Long-established financial firms must innovate, update and restructure to maintain their edge over upstart enterprises, says Chen Wenhui, IFF vice-chairman and vice-chairman of the National Council for Social Security Fund
IFF China 2021 5-01
IFF China 2021
This article is part of The IFF China Report 2021

The growth of the digital economy is expected to continue with the industrialisation of digital technologies, followed by the digitalisation of entire industries worldwide, including traditional ones such as real estate. In other words, the digital economy and the internet will bring about a revolution in all industries. China will undoubtedly see an active development of digitalisation in its jurisdiction. This will be a game-changer for the industrial sector. In November 2020, the first 5G+ Industrial Internet Conference was held in Wuhan, where the Chinese government’s interest was confirmed by President Xi Jinping’s congratulatory letter to the event. 

The financial sector is also exploring digital transformation, which is likely to enhance the efficiency and business scope of many financial institutions. It is believed this transformation will significantly improve the efficiency and quality of China’s economy, contributing to the realisation of the 14th Five Year Plan (2021–25) for National Economic and Social Development and Long-range Objectives Through the Year 2035. 

Chen Wenhui - IFF China 2021 headshot 5-01
Chen Wenhui

The financial sector has accumulated a huge amount of data over the past few years, which will be a firm foundation for digital transformation, but there is a long way to go. Traditional financial institutions are actively exploring and experimenting in this area, but the majority of their digital transformation has been realised as a shift from paper- to computer-based work. What is needed is to restructure businesses via digital technologies, signalling a total transformation. 

Data trumps capital

Since the Industrial Revolution, capital has been – and remains – the most important factor of production; but this will no longer be the case. In the era of digitalisation, data has become the most important commodity, altering the pattern of economic development. 

The primacy of data also applies to the development of financial institutions. It has become an important reference for them to improve risk management, enabling these institutions to proactively find potential clients rather than waiting for them. Digital transformation will only be a success in the financial services sector when firms fully adapt to the new pattern of businesses. 

A clear road map is important for this transformation. The innovator’s dilemma, written in 1997 by Clayton Christensen, a US business consultant, analyses leading enterprises in the computer, automotive, telecommunications and other sectors. According to Christensen, despite early advantages in sustaining innovations, enterprises can often be overtaken by smaller counterparts that are active and disruptive in nature. For example, emerging companies in the automobile industry, including Tesla, NIO, Xpeng and Li Xiang, are performing quite well in the capital markets compared with those long established in the market. 

A similar trend is emerging in financial services – traditional firms must also innovate and adapt to disruptive new entrants if they are to continue to thrive. For example, Rootcloud Technology  –established by a former senior employee of Sany Heavy Industry, a Chinese construction machinery manufacturer – is an internet of things-enabled platform, empowering not only Sany, but also other enterprises. 

Traditional financial institutions can learn two things from this trend. First, to push this transformation forward, senior management must adopt the mindset of the digital economy. Second, long-established enterprises must overcome institutional barriers. These enterprises may show little interest in emerging digital departments because of low gross margins and greater resources required. Rootcloud Technology could reveal a solution – establishing an institution with internet-oriented advantages and resources, to grow independently and serving other enterprises in return.

In conclusion, digital transformation will be crucial for the development of financial institutions. The task is to figure out the road map and then implement it – an undertaking of long-term importance for the financial sector. 

 

This article is part of The IFF China Report 2021, which draws mainly on content provided by China-headquartered think tank, the International Finance Forum, and is published in association with Central Banking.

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