26 Oct 2015
Being a disruptor is a privilege and a responsibility
The second Machine Age has arrived.
The second Machine Age has arrived. Digital technology could mean that by 2030, 47% of current US jobs, and 37% of UK jobs UK will have disappeared.
We are beginning to recognise that Digital change is having a massive impact on our lives: at home, at work, in our social interactions and on the ‘big issues’ including migration, political and even military conflict.
We’re already seeing the impact of digital self-service on many lower-paid jobs – retail staff, taxi drivers and call centres for example. The UK has already outsourced most manufacturing to Asia, and most technology to California – and as digital moves up the value-chain and hollows-out middle-management jobs the impact will be even more severe.
Our collective goal should be to use the Second Machine Age to improve lives and build a digital future that helps all of society, not just the 1% or 0.1% who ‘own the robots’.
Making digital changes in financial services help customers
Embedding sensory and wireless technology into objects - effectively bolting Bluetooth onto everything from cars, to gym bikes to houses will revolutionise the way we live our lives.
Intelligent, energy-efficient modular housing will enable digital cities to use clean solar or wind energy, effectively going ‘off-grid;. Technologies like 3-D printing, nano-technology and graphene will force almost all companies to change their business models. Financial services companies will not be immune: money is the ultimate “digital good”.
For example, motor insurance – a $6,000 billion global market – will have to change or disappear as cars, with or without drivers, communicate directly with insurers through black boxes. The same will become true of health cover, with the human body transmitting data directly. This requires embedding digital at the heart of businesses. We’ve already taken big strides to do this at Legal & General.
We’re disrupting our own business
Our aim is to build a strategy that is digital, rather than a digital strategy. This lets us disrupt our own well-established markets. We’ve driven change in the life insurance marketplace, replacing expensive and time-consuming underwriting processes with digital solutions that mean 90% of customers can be accepted immediately online. Market disruption has seen our share of the UK life insurance market grow from around 5% to 25% over the last decade.
We’ve applied the same strategy to the auto-enrolled pensions market, where market disruption from automation means UK consumers now enjoy lower charges. Our own customers have charges well below the government’s 0.75% annual charge cap. Employers can link their payroll systems to our own processes. As auto-enrolment matures the challenge is how to deliver for the growing SMEs. Our solution is digital self-service – and it’s working.
Making digital change more inclusive
Too many people, right across the UK population, simply don’t understand financial services. They don’t know the value of their pensions or their investments. Customers have a low boredom threshold when it comes to personal finance: we have to change this.
Digital is key: We’ve a hugely successful ‘Everyday Money’ programme in schools, which currently relies on interaction and role playing. But this is analogue and it’s hard to provide scale if you do it on a one-to-one basis.
Educational materials, like our ‘Rough Guide to Finance’ are fully digital. We communicate not just through traditional media but through our Google Hangouts – a first in financial Services.
Using technology to provide insurance for millions
In India we’re working with the government, who have an outstanding digital programme encompassing mobile technology and retinal scanning. Mobile phone users can now access low cost digital life insurance.
We’re now working with mobile phone operators across the world to extend this idea, and in the UK we want to enhance financial resilience with low cost, digitally-delivered protection for individuals and families. We believe we can offer the under 40s life insurance, with premiums of as little as £1 per month. The product we’re developing has a working title of ‘Quidcover’. Pricing uses big data analytics and digital delivery. Digital deployment is the only economic model that can deliver scale and value to create a market which simply doesn’t exist yet. This is how we can implement a ‘Beveridge 2.0’ model’.
Digital advice can replace financial advisers?
Financial advice is too expensive for all but the wealthy. In the UK, 60% of people say they don’t need it, almost a third say it’s a waste of money, and a similar number say they just can’t afford it, given the starting rate of around £125 per hour. But digital advice has zero marginal cost – it will grow exponentially.
That’s why we advocate the ‘Robo-advice’ model which uses digital applications – with or without human intervention - to provide either education or fully-advised sales. This will grow as pressure grows on cost of service and fees, as we see 'Gen Y' coming of age as financial consumers and investors, and as the number of qualified human financial advisers dwindles. For this to really work, we need our regulators, as well as our industry to move from an paper-based, analogue model to a digital model – something the Treasury and FCA are now addressing in their Financial Advice Market Review.
From ‘start ups’ to ‘grown ups’
There is investment in digital start-ups, but very few FinTech disruptors have achieved real scale – a disappointment. California has a developed infrastructure for tech investment and re-investment and a thriving equity culture, but the infrastructure for digital or tech innovators to grow from start-up to grown-up is far from optimal in London and Europe.
We’ve multiple incubators – a fragmented cottage industry - and too often the measure of success is how many companies are in the incubator, not what is the growth factor of those companies. Much of the investment in digital therefore has to be done inside large companies like Legal & General.
We need to mobilise the long-term investments to create the digital cities of the future – institutions like Legal & General can help do so, in constructive collaboration with governments. Media City, in Salford, Greater Manchester, is one example where we have invested. Tech City and Science City are the obvious next steps. Our recent investment in Cardiff, Wales, is further evidence of the potential. The economic multiplier from digital investment is estimated at up to 20 times - £20 of economic activity for every £1 invested – so the size of the prize for cities is huge.
Three big questions:
The first Machine Age – steam, electricity and production-lines - changed working practices beyond recognition, and delivered economic growth. As the Second Machine Age unfolds, we are again entering unknown territory.
I'm an optimist about the capacity of digital to deliver positive change in the second Machine Age. Successful businesses will ride the digital wave, and gov.uk is moving in the right direction, as are many emerging market governments. Businesses like media, music, travel and retail became better for consumers as a result of digital disruption, and so will financial services.
But there are unanswered questions: what, for example, what does “productivity” mean in an economy when production can be undertaken by much fewer people, working with robots and digital communications? Will technology create enough new activities to compensate? And when ‘WhatsApp’ can change hands at a value of over $300 million per employee, what are the implications for inequality and generational unfairness, and do we need a broader distribution of the 'digital dividend'?
Whether the digital future is a utopia or dystopia depends on us all rising to the challenge: ‘We are the We’. The one thing we can be sure of is that we can’t stop it.
This blog is based upon a presentation given by Nigel Wilson in Venice (PDF, 1.5 MB) on 2 October 2015.
So, what do you think?