Technologies that have decimated and transformed the retail and manufacturing sectors are finally ‘knocking at the doors’ of the services sector, and institutional investors need to build a higher level of technology education among in-house sector specialists to stay ahead of the curve, argues Taimur Hyat, chief operating officer at PGIM, the investment management business of Prudential based in New Jersey.
But Hyat said more incumbents in financial services would survive and thrive than was the case when retail and manufacturing were disrupted, as incumbents within this sector have stickier client bases, more complex regulatory structures, and at least winning incumbents are making the investments needed in cutting-edge technology, do technology-driven M&A, and are willing to cannibalise their own business models.
It is imperative for investors in financial services to observe which incumbents are making the transition and positioning themselves for the future, he said.
“The leading incumbent service firms have seen this movie before in other sectors,” Hyat said.
“They are embracing technologies and there are ways to empirically test whether they’re doing so. They’re willing to cannibalise their legacy models and it’s important to keep an eye on them and understand that bifurcation of incumbents into those evolving with the times and the dinosaurs who will be left behind.”
In an interview as part of the Market Narratives podcast Hyat raised the impact of key technological advances on healthcare, finance and logistics, drawing from the insights from PGIM’s recent paper, ‘Reshaping Services: The investment implications of technological disruption’.
Hyat gave the example of robo-advisers which were seen as a threat to wealth management businesses.
Large wealth managers have built digital user interfaces that drive down costs or have “simply acquired these robo-advisors and become more powerful themselves,” he said.
Also acting in favour of incumbents is the fact that customers are a lot more “sticky” in the financial services industry than in other industries. Customers are much less willing to switch health care providers or financial advisors than they are to try a new app for booking restaurants or ordering groceries.
Regulatory barriers and the risk of regulatory backlash also create tech inertia in these sectors, making it harder for new entrants to arrive and completely revolutionise the way things are done.
Institutional investors need to separate “breathless media hype” from the “investible reality today,” Hyat said, singling out public blockchain, automated vehicles and drones as technologies that may fall short of investor expectations.
The internal combustion engine will see a “long sunset”, he said, owing to regulatory uncertainty around AV, the enormous job of building new EV infrastructure, and concerns from some governments over potential job losses from automating truck driving.
“We think AVs will take longer than people expect beyond certain closed loops and certain… trucking circuits and a couple of emerging markets that are kind of making the bet there,” Hyat said.
But he does believe neo banks and fintech payment platforms are two areas where there is a strong opportunity for venture capital.
“We do think neo banks are actually not trying to steal the customers of the existing incumbents, which as I just said, is expensive and quite hard,” Hyat said. “But they’re trying to go after unbanked populations that were too expensive or didn’t have enough profit margins for old-fashioned bricks-and-mortar technology to serve them.”
On the topic of payment platforms, “the MasterCards and Visas of the world are ripe for disruption,” Hyat said, particularly in emerging markets without deeply entrenched legacy payment systems.
For the podcasts in this series see PGIM’s Harsh Parikh on getting the sensitivities right in real assets.