IMD’s Center for Future Readiness tracks which companies are the most future-ready. It recently published the future readiness indicator for financial service companies. This year’s rankings are largely dominated by US firms, like in the past.
We speak with Howard Yu, LEGO® Professor of Management and Innovation at IMD, about what the top-ranking companies are doing right and what Asian firms can learn. We also speak about the surprising narrative of big banks trumping fintechs in terms of future readiness and how financial services companies can navigate a rather unpredictable landscape.
Unravel: In financial services, from 2015 to 2022, Mastercard has held top spot with Visa holding second spot? What explains their dominance? What are they doing right that others can’t shake them off their positions?
Howard Yu: Mastercard and Visa holding on to the top two spots for so many years is quite unique. As you would imagine, most industries are going through convergence, including the world of finance. I think both Mastercard and Visa have really cracked the code when it comes to facing industry convergence, and the next wave of disruption. They have figured that you cannot always rely on your own internal invention. In order to successfully stay on top of the competition, you need to partner with your enemies at times. So, this is what makes them quite distinct.
Obviously, at first, they partnered with all kinds of fintech disruptors, but eventually they moved into a very systemic way of investing in API’s and interfaces. And it’s this explicit recognition that we need to partner with our historic enemies like PayPal, for instance, that sets them apart. This is a complete mindset shift. That is how they have stayed on top of our rankings. If you look at their growth, revenue, top line, user base growth all the way to employee productivity – it is a very well-balanced scorecard which is incredible.
Unravel: American companies dominate the top 10 spots in the financial services rankings with seven. This has pretty much been the trend since 2015. Why do you think this has been happening?
Mr Yu: Yes, that’s true. I mean, from time to time, you do see a company from Asia moving into the ranking and having a period of good run as well. In the world of finance, we see that Singapore’s DBS Bank is really thriving. What you see them do is essentially very much like the spirit of Visa and Mastercard, although they come from the traditional bank. I would argue that 2022 is the era for big banks to revenge—if I may will—against fintechs because our economic outlook is very different now. And investors are looking for quality earnings growth at all cost. So, companies such as DBS stand a very good chance to move up and capitalise on the growing opportunity because there is much more uncertainty now in 2022.
But going back to your question, why there are less companies from Asia in the ranking? If you think about Asia, manufacturing has always been a big strength. And in technology, except for hardware, Asia has mostly lagged its Western counterparts. When you think in terms of the strength of corporate America, they have a high innovation culture. If you are thinking about leading-edge technologies, the design capabilities are mostly held by the US – irrespective of where it is manufactured. And then there is ease of doing business, transparency, rule of law, the lack of bureaucracy – all of these counts when it comes to corporate innovation.
Unravel: In this year’s rankings, big banks have trumped fintech companies. Is this surprising given that banks have traditionally been viewed as laggards when it comes to digitalisation/ transformation?
Mr Yu: It is very surprising, you know. For the longest time, we have been living in such a low interest rate environment that investors have been throwing money at startups and unicorns. Of course, we had the stimulus programmes rollout in the US, Europe and also in Asia. The market was just flooded with liquidity. Now that is drying up. Inflation is on the rise with a new war in Europe. This economic uncertainty has pressurised all to think about rising interest rates, and the Fed’s impending 50 basis point raise in interest rates. This will have direct implications on the cost of borrowing. Once the cost of borrowing surges, fintechs can no longer just give away free services. Companies like Robinhood, for instance, charges a very low fee for services to attract the millennial and younger generation. That playbook is over. It is really a big seismic shift in 2022. We haven’t seen anything like this before. We are entering a completely new and unknown business environment.
However, banks that continue to be conservative in their outlook and do not do any experimentation, are still going to die. In fact, we’re talking about only a handful of big banks that are forward looking and high on their readiness ranking that will continue to prosper. The fact is, consumer behaviour has changed. Even the boomers and the retiree experienced the benefit of e-commerce and e-banking – they’re not going to go back to the physical branch. So, big banks simply got a chance to revert their declining fortune because of the pandemic. But if they just sit on their laurels and think things will return to how they were 10 years ago, they are highly mistaken.
Unravel: Other than DBS Bank and Ping An Insurance, no other Asia-Pacific financial services firm finds a place in this year’s rankings. What can financial services firms in the region do better or learn from their western counterparts?
Mr Yu: I think there are two parts of Asia. One part of Asia comprises companies that are really relevant and innovative. There are many tech companies in Asia, capitalising on different technologies. They are also now becoming more cautious about generating healthy cash flow to save for the rainy days.
At the same time, there is another part of Asia, which is very, very traditional. In Asia, you have a lot of family owned businesses and state-owned enterprises (often a monopoly). Things tend to move very slowly with such companies.
I think in Asia, what we can learn is simply knowledge sharing. For instance, if your family run business is operating in a traditional way, you’ve got to look at a fast-moving company in the region, learn from them – so that you get up to speed. I see a dichotomy in most of Asia.
Unravel: How can financial services firms navigate a landscape dominated by the war in Ukraine, the continuation of the pandemic and surging inflation?
Mr Yu: I think, in 2022, and moving forward, it’s this idea that even when you are a regional operator or business – business diversification is key. It is really important that if you’re a financial services company, you have a varied portfolio to work with – so when the consumer loan lending is going down, maybe your SME lending is going up or when your SME lending is not doing so well, maybe the insurance business is going well. So that becomes extraordinarily important.
And then the last element is that it is so easy to sacrifice long-term sustainability, in the quest for short-term gains. Today’s revenue of low quality can dampen long-term prospects for years. So, it is critical to take a long-term sustainable view of business. These are all key components of being future-ready.
Unravel: This is a question separate from the index, professor. How do you think a return-to-office scenario is going to impact financial services companies in terms of talent? And what do you think the top companies will need to do to maintain their rankings?
Mr Yu: Top ranking companies should be able to embrace hybrid work, period. The reality is that top-notch talent want flexibility. Pew Research came out with a report speaking with 2,000 Americans and people basically said that if their employer didn’t allow them to work remotely and have some flexibility, they were going to leave their job. Now, the labour market is still hot across the world. You look at even Silicon Valley, whether it’s Microsoft or Apple, those office centric companies are still talking about one or two days per week for people to work from home. And then you have big companies like Airbnb going completely remote. So, companies that can leverage hybrid work using digital transformation will see their productivity rise.
The second part of this conversation is around the future-readiness indicator for the automotive sector and can be read here.
Howard Yu is the LEGO® Professor of Management and Innovation at IMD. He is the author of the award-winning book LEAP: How to Thrive in a World Where Everything Can Be Copied. He is also a two-times (2013-2015) prize-winning case writer awarded by the European Foundation for Management Development (EFMD) - Europe's largest network association in the field of management development, with more than 800 member organizations. In 2017, Yu was awarded for his work in the "outstanding case writer on the hot topic Big Data - Risks and Opportunities" category at the Case Centre Awards, which are called the business school Oscars by the Financial Times. He delivers customised training programmes at IMD for major global companies in Asia and Europe including China's TravelSky, China Resources, COFCO and Tencent; Japan's Nitto and Recruit Holdings; Singapore's Temasek, ASML, Daimler, Bosch, Electrolux, LEGO, Sanofi and Novartis. Professor Yu is a Hong Kong native and has worked in the Hong Kong banking industry.