THE INNOVATION EDITION - 1ST QUARTER 2020 - Contentstack
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1ST QUARTER 2020 THE INNOVATION EDITION FINDING THE OPPORTUNITIES IN INNOVATION BANKING ON INNOVATION SUSTAINABLE SUSTENANCE: THE FUTURE OF FOOD DRIVING INNOVATION THROUGH ESG SOLUTIONS INNOVATION IN FINANCIAL PLANNING HINDSIGHT IS 2020 VISION
TABLE OF CONTENTS
FINDING THE OPPORTUNITIES 4
IN INNOVATION
BANKING ON 13
INNOVATION
SUSTAINABLE SUSTENANCE: 18
THE FUTURE OF FOOD
DRIVING INNOVATION THROUGH 23
ESG SOLUTIONS
INNOVATION IN 26
FINANCIAL PLANNING
HINDSIGHT IS 28
2020 VISION
2
INTRODUCTION
CHRIS POTGIETER, MD: OLD MUTUAL WEALTH TRUST COMPANY (PRIVATE CLIENT
SECURITIES |TREASURY AND ADVISORY SERVICES | FIDUCIARY)
This year, Scientific American, a shared, enhanced and implemented In the investment arena,
popular US magazine covering relatively easily and efficiently. environmental, social and
groundbreaking events in science governance (ESG) considerations
and technology, celebrates its These are indeed exciting times as have been on the agenda for a
175th year. This publication has we are witnessing unprecedented while as it has become abundantly
become renowned for pinpointing transformations across industries, clear that embedding ESG factors
emerging trends and has featured which are leading to new into capital markets makes good
some of the world’s most prolific opportunities and challenges – and business sense and leads to more
discoveries and innovations since of course, higher expectations. As sustainable markets and better
its inception. Old Mutual also technologies such as connected outcomes for societies and our
celebrates its 175th year, having intelligence and the Internet of planet. We unpack what this means
been established in 1845 as South Things become more mainstream, at Old Mutual and highlight how we
Africa’s first mutual life insurance businesses that do not effectively are driving innovation through our
company. Over the years, our group adapt face the risk of falling behind or ESG solutions. We then conclude
has played a pivotal role in shaping even becoming obsolete. No industry our Innovation Edition with an
the local life insurance and broader is immune to the current tide of interesting piece on how recent
financial services industry, and technology-driven disruption and enhancements to our Integrated
we are focused on innovating to our feature article outlines a few key Wealth Planning tool have taken
continue meeting the demands of developments that have the potential financial planning to the next level.
our clients well into the future. to disrupt and transform existing This is a powerful demonstration
industries over the next decade. of how we at Old Mutual strive to
It is often said that we live in an influence and lead innovation for
era of innovation, but the reality We then delve deeper into the the benefit of our clients.
is that innovation is nothing new. banking industry and discuss how
Consider the inventions of Thomas the landscape is changing following I trust this edition will energise you
Edison (often considered the the emergence of challenger banks, and give you a sense of the exciting
Father of Innovation), Alexander and observe how traditional banks opportunities that lie ahead of us in
Graham Bell, Marie Curie and are adapting to remain relevant the next decade.
Henry Ford, to name but a few. and achieve new levels of growth.
While all of their discoveries might Even farming, one of the world’s All the best,
seem quite mainstream now, oldest industries, is undergoing Chris
they were perceived as highly significant transformation driven by
innovative and disruptive back evolving consumption demands. By
then. So while the concept of leveraging science and technology,
innovation has been around for we are increasingly moving towards
aeons, what is different now is that a healthier, more sustainable world
the pace of change is increasing and we highlight some of the most
rapidly. This is largely because we innovative technologies in our article
live in an interconnected world on food innovation.
where thoughts and ideas can be
3
FINDING THE OPPORTUNITIES IN
INNOVATION
CHRIS POTGIETER, MD: OLD MUTUAL WEALTH TRUST COMPANY
(PRIVATE CLIENT SECURITIES |TREASURY AND ADVISORY SERVICES | FIDUCIARY)
4
I
t is easy to forget that just a Shortly after Netflix launched its THE ADOPTION AND
decade ago, when we wanted streaming service in 2007, Jim Keyes GROWTH CYCLE
to entertain ourselves at home, – then CEO of Blockbuster Video Change brought about by new
we often fumbled through – commented: “Neither Redbox technologies is often stealthy and
predetermined programming on nor Netflix are even on the radar slow at first. Early adopters of novel
satellite television, hoping to find screen in terms of competition.” technologies become advocates to
something that piqued our interest. Blockbuster, which at its peak a wider audience – either directly
This shotgun approach often led employed well over 80 000 people or indirectly because of the edge
to desperation or exasperation and worldwide, filed for bankruptcy a they gained through the new
forced us into the car to visit the mere three years later. Netflix, on technologies. This leads to rapid
nearest video rental store. Today the other hand, grew its subscriber growth and economies of scale and
we are spoilt for choice and, at base to over 150 million in the competition that begets even more
a relatively low cost, can watch 10 years after 2007. Today, Netflix, growth as the technologies become
whatever we want, whenever we itself faces competition from on- cheaper and more accessible.
want on whatever device we prefer. demand streaming services offered Ultimately, as growth levels off,
Entertainment has certainly come a by Amazon, Disney and Apple, and another disruptive technology
long way. other forms of online entertainment challenges the status quo and leads
such as short-form videos on social to the next cycle of adoption and
media platforms, e-sports and growth. In this process of creative
YouTube, to name but a few. destruction, whole industries (and
jobs) are transformed or displaced.
GARTER MODEL OF TECHNOLOGY ADOPTION
On the rise At the peak Sliding into the trough Climbing the slope Entering the plateau
Activity beyond early adopters
Supplier
proliferation Negative press begins
Mass media High-growth
hype begins adoption phase
starts: 20% - 30%
of the potential
Early adopters Supplier consolidation audience have
investigate and failures adopted the
innovation
First-generation Methodologies
EXPECTATIONS
products, high and best practices
price, lots of developing
customisation Third-generation
Second/Third round
needed products, out-of-the-box
of venture capital
funding product suites
Second-generation products,
Startup companies, some services
first round of venture
capital funding Less than 5 percent of the potential
R&D audience have adopted fully
Innovation Peak of inflated Trough of Slope of enlightenment Plateau of productivity
trigger expectations disillusionment
TIME
5
FINDING THE OPPORTUNITIES IN INNOVATION
Technologies tend to develop in
separate paths until they intersect,
often in unexpected ways. At the
intersection, they reinforce and
enable one another in a way that
leads to accelerated development
and growth in applications. Consider
how Netflix was able to grow its
services and subscriber base so
rapidly. While content is critical, it is
not the only factor, as the physical
infrastructure created during the
tech boom of the early 2000s
effectively enabled streaming –
from the fibre networks that
connect server farms to households
to the processors and memory chips
embedded in mobile and smart
devices. 1. CONNECTED THE RISE OF THE MACHINES
Google Maps can also be considered
INTELLIGENCE
It is often said that we live in an age as a form of artificial intelligence
Mobile phones have changed our
of innovation, but innovation itself (AI), which is often overhyped and,
lives in profound ways. With the
is not new and has been a constant consequently, seen as a serious
computing power of room-sized
feature of human development for threat to human relevance. However,
computers of the 1970s in the
centuries. As investors, the greatest AI has a long way to go before it can
palm of our hands, we are now
opportunities lie in identifying replace human input on a large-
able to communicate, calculate,
industries and companies with scale basis. In the meantime, we
navigate, organise our lives,
sustainable and profitable growth will continue to reap the benefits of
monitor our health, access news
paths. In this article, we outline a incremental development through
and information, transact, capture
few key areas of innovation that we applications that improve our lives.
perfect images, educate and
believe have the potential to disrupt Consider AI that can identify and
entertain ourselves. Yet, it is not just
existing industries over the next anticipate potential threats, facilitate
the hardware that enables this. It
decade, leading to new demand cross-cultural communication and
is the connectivity to the internet
curves as industries and consumers interaction, improve education
via an extensive global network
shift to capture the benefits offered outcomes, perform mundane or
infrastructure and the application
by these innovations. repetitive tasks with high levels
software connected to the cloud.
of acuity, and help us make more
Even more important is the fact
informed decisions or sharpen
that everyone is participating and
our skills and memory. This is not
making useful connections possible.
pie-in-the-sky and companies such
This is called the network effect
as Alphabet (which owns Google),
and its premise is simple – the
Facebook (which owns a number of
more people and services that are
social media platforms), Microsoft
connected to a network, the more
and Amazon are all investing
valuable that network becomes to
significantly in AI to solve problems
every participant. Google Maps is a
and improve lives. By some accounts,
form of connected intelligence as
China may already be leading the
the navigation guidance provided
way as far as certain applications of
is enabled by a combination of
AI are concerned – surveillance and
accurate maps and real-time geo-
threat identification being prime
location and intelligence collected
examples. AI is a good example of
from all its users.
a new technology whose impact
6
may be overestimated over the short US is following suit), companies such These shifts have obvious negative
term but underestimated over the as Apple, with about 900 million implications for the traditional
long term. handsets in circulation, will be able companies in manufacturing,
to tap into a new replacement cycle financial services and energy. Still,
Various devices are increasingly for handsets as 5G-enabled phones new opportunities are being created
being connected to intelligent become the standard. However, the as the current modes of mobility
networks – the so-called internet greater revenue potential sits with decline. New modes of mobility
of things (IoT). These connections new services that will be offered over involve many technologies – from AI
are enabling many of the the new network infrastructure. to alternative (green) energy. A stark
aforementioned human applications example of the potential disruption
as the “eyes and ears”. Still, many is seen in the military where
more of these connected devices 2. MOBILITY unmanned aerial vehicles (UAVs)
will operate autonomously – silently Thanks to mobile devices, there is or drones are steadily replacing
monitoring and intervening as no longer any need to visit a bank, manned aircraft. The capabilities
necessary to keep processes running travel agent or a physical store. of these UAVs and the operational
optimally. Honeywell, one of our Transactions can be done online, cost advantage exceed traditional
portfolio companies, has already anywhere and at any time. Orders aircraft by a significant margin.
brought such applications to market are increasingly fulfilled by robotic While air defence still involves
and continues to invest heavily in assistants – both physical and human intervention, the writing is
the IoT. As an example, the company virtual. The 5G technology already on the wall. It does not take much
has developed and installed voice- mentioned will enable better imagination to extrapolate these
directed systems in Amazon’s remote communication capability, military technologies into the
warehouses that accurately guide which will impact areas such as commercial sphere. Tesla is the
employees to goods, helping office work, sales and education. poster child for electric vehicles (EVs)
While our need for mobility has and Alphabet is seen in a similar
Amazon reduce costs and shorten
reduced, it will not be completely light for autonomous vehicles (AVs).
the time between orders coming
These technologies are coming
in and packages going out. While eliminated and our means of
together at a rapid rate and unit
Amazon is an important customer, transportation is increasingly
costs are declining. Most traditional
it is not the only one as around two- becoming a service as opposed to
vehicle manufacturers are now
thirds of the top 50 US retailers use a personal asset. Consider the likes firmly committed to producing EVs
Honeywell’s Intelligrated technology. of Uber and Lyft, who specialise in and funding developments in AVs.
transport as a service. Significant progress is being made
The impending fifth-generation to increase the energy densities
cellular wireless standard (5G)
promises to be an important
enabling technology to AI, the IoT
and other infant-stage technologies.
The higher frequency band utilised
by 5G will allow much faster data
transfer speeds and greater capacity
for connected devices. Currently,
there are an estimated four billion
people connected to the internet
and more than double that in
number of devices. Some estimates
indicate that up to 75 billion mobile
phones and other devices will be
connected by 2025 – a growth
rate of well over 30% per year. As
wireless carriers invest in the new
5G infrastructure as expected (China
has made it a top priority and the
7
FINDING THE OPPORTUNITIES IN INNOVATION
of batteries, which is seen as one
of the biggest hurdles towards
electrification of the transport
system. China is setting an example
with the increased electrification
of their transport system and their
investment into battery technologies
and manufacturing. If regulatory
approval of AVs is granted, we
could see a rapid shift towards on-
demand autonomous EVs owned
by fleets, not individuals. Individual
vehicle ownership, especially
of internal combustion engine
vehicles, will then enter a vicious
cycle of increasing costs, decreasing
convenience and diminishing quality
of service. While causing pain to
traditional industries over the short
term, the long-term benefits to
society and the planet are worth it.
The manufacture of nanomaterials In the world of
such as graphene happens at the
atomic scale whereas in chemistry materials science, it
3. MATERIALS SCIENCE it occurs at the larger molecular
In the world of materials science, scale. This allows for the creation of seems that the closer
it seems that the closer we look materials with novel characteristics.
and the smaller we go, the bigger While graphene surpasses the we look and the smaller
the world of possibilities becomes. physical qualities of natural silk in
Furthermore, nature presents riches all respects, except aesthetics, even we go, the bigger the
this aspect is a target for innovation.
open to discovery and application
The production methods and
world of possibilities
in human life. For example, silk
has been used for aeons in the applications of nanomaterials are becomes.
manufacture of garments and contributing to accelerated progress
parachutes. The first production in other areas of technology. Thanks
of the material in China goes back to these advancements, and better
6000 years. While cotton mostly energy management software
replaced silk during the Industrial for larger battery installations,
Revolution, followed by nylon in lithium-ion batteries now have far
the 20th century, silk fibres are greater energy densities (amount
now receiving renewed attention of energy stored per unit mass) and
as structurally superior materials. In faster charging cycles than only a
healthcare, silk’s strength, flexibility, few years ago. Yet, the potential
conductivity, bio-compatibility for even greater energy densities
and bio-degradability make it a and longer battery life exists when
contender for more effective drug nanomaterials find their way
delivery, wound dressings, bone directly to battery cathodes and/
reinforcement and even replacing or anodes. This will have major and
tendons. Industrial applications of positive implications for alternative
silk include replacing Kevlar in the energy sources and electrification of
weave in bullet-proof vests and steel transportation.
in thin gauge high-tensile wires
and sheaths. While viscose ryon As our ability to manipulate a vast
has been used as an inexpensive array of materials at the atomic
artificial replacement for natural silk and molecular level continues to
in garments, the other combined improve, production will become
qualities of natural silk have not easier and more cost effective,
been replicated by chemistry. Enter spurring new applications across
the world of nanomaterials. many industries in the next decade.
8
4. HEALTHCARE and others are continuing to
The cost of gene
Founded by two inspired brothers improve on the cost, speed and
in 1886, Johnson & Johnson’s first accuracy of gene sequencing sequencing has come
products were a line of ready-to-use technologies. The cost of gene
surgical dressings. The company sequencing has come down from down from US$100
has evolved into one of the world’s US$100 million in 2001 to
largest with a vast healthcare and US$1 000 today and can be million in 2001 to
consumer product range. It now performed at home through a mail-
employs 135 000 people who serve order test kit. Technologies such as US$1 000 today and
CRISPR Cas-9 were developed to
more than one billion patients each
edit and modify genes – the next
can be performed at
day. Annual revenues are now over
US$80 billion, but what is more logical scientific step. Again, the home through a mail-
impressive is that 25% of revenue accuracy and accessibility of this
is generated by products launched technology are improving while order test kit.
within the last five years. Such is the costs fall rapidly. However, the
pace of innovation and competition advancements in gene sequencing,
in healthcare, that companies have editing and modification are
to invest significantly in research and controversial and the acceptance
development (R&D) on a continuous of these technologies is slow.
basis to remain relevant. Johnson & Nevertheless, gene editing and
Johnson now spends over modifying technologies carry the
US$10 billion per annum on R&D. promise of fundamentally altering
The other healthcare company human health and wellness
within the PCS Global Equity outcomes, and given the pressures
Portfolio, Medtronic, has a similarly on the current healthcare system,
impressive track record it is probably a matter of when,
of innovation. not if, these technologies become
mainstream.
The combination of a large ageing
population that is straining the
healthcare system and a growing
younger generation that will
demand better and more cost-
effective healthcare means that the
industry is attracting the interest
of companies from other sectors.
Notwithstanding its significant
spend in R&D, healthcare is an
industry that is ripe for disruption.
The advances in sensing technology
such as miniaturisation, integration
with smart mobile devices and
intelligent diagnostic software mean
that we already wear a “doctor” on
our wrist. Apple, Fitbit and others
are advancing these technologies at
a rapid rate. It is a sensible shift to
prevention rather than cure.
When the human genome was
first sequenced in 2000, the path
was created for innovations that
would prove to be truly disruptive.
Companies such as Danaher,
Illumina, Thermo Fisher Scientific
9
FINDING THE OPPORTUNITIES IN INNOVATION
5. FOOD TECHNOLOGY (today between 800 million and medicines and vaccinations. Innovative
When Neil Armstrong set foot on 1 billion people are starving). Food companies to watch include Zoetis,
the moon just over 50 years ago, the production will have to increase by Novozymes, Xylem, Trimble and Deere
population on earth was less than half nearly 50% by 2050 to keep pace & Co.
of the current 7.7 billion. The animal with demand growth. All of this
population, however, was double has to happen while the climate is There is also increased recognition
what it is today and this decline is changing in ways that will limit our that, apart from grain farming, open
largely as a result of our food system. ability to produce food by traditional field farming is suboptimal in most
means. cases and that farming within a
Currently, we rely on nine plants for controlled environment – such a
two-thirds of food production; 40% NECESSITY IS THE MOTHER OF greenhouse or using crop covers –
of arable land has been depleted INVENTION yields superior results. One does not
because we have compromised In the early 1800s, British economist need a lot of land to produce food.
natural regeneration to restore soil Thomas Malthus warned that the Holland is about the size of the Kruger
health and diversity in our fields; earth could not feed any more Park but is the world’s second largest
and the United Nations estimates people. However, he missed exporter of agricultural products. As
that 1.3 billion tons of food are lost or the contribution of two key a case in point, Dutch farmers are
wasted annually, equating to roughly technological advancements: the achieving double the yield on potatoes
one-third of global food production. production of fertilisers and steam- (20 tons vs nine tons per acre) with
Fertiliser and pesticide run-off has powered transportation. Today, 10% of the water compared to open
contaminated rivers and oceans. precision farming and precision field farming. Vertical farms and
Freshwater use for food production biology hold the promise to hydroponics may appear to be some
stands at 70% of available resources. revolutionise food production. way from making a material impact,
Water use has tripled since the 1950s but the enabling technologies, such as
and demand continues to soar. Under Precision farming refers to how new energy-efficient spectra-specific LED
current trends, demand for water will technologies are used to increase lighting, are developing rapidly and
exceed supply by 40% in 2030. productivity in food production. will find application in many areas of
Advances include networked food production to increase efficiency
The global population is set to environment sensors, satellite and and yields.
increase by one billion over the next drone imaging, precision application
decade and reach nearly 10 billion by of fertilisers and pesticides, precision Precision biology relates not just to the
2050, while calorie intake per person irrigation, and the IoT, which brings well-known (and contentious) genetic
is set to increase as middle classes it all together. Animal health is modifications to plants and animals,
expand and starvation is addressed also advancing with improved but also to the application of micro-
organisms in novel ways to support
plant and animal health and growth.
Related to this, and with the potential
to fundamentally disrupt the way
protein is produced and consumed,
are the technologies employed by
companies such as Beyond Meat and
Impossible Foods to emulate the
qualities of animal protein through
plant-based or lab-grown alternatives.
Precision fermentation is another
related process that allows us to
program micro-organisms to produce
almost any complex organic molecule,
including proteins. Notably, precision
fermentation has already replaced
the production of many important
proteins including insulin and milk
10A world of opportunities
All the advances and potential
applications outlined present
another exciting phase in human
development. With “2020 hindsight”,
we can see how our lives have
changed and improved through
innovation over the last decade.
For all its problems and challenges,
one can argue that the world is a
better place than it was 10 years
ago. Good and bad mostly happen
concurrently, even in the same place
– it is not either/or. The technological
foundations have been laid for even
more useful innovations that will
improve lives and limit – or even
proteins (whey and casein). Could 6. FINANCIAL SERVICES reverse – our impact on the planet.
we be producing most of the human On many accounts, rapid innovation Our technologies will also open the
protein requirements in industrial and disruption are already well world to new vulnerabilities and
bio-reactors as opposed to cattle underway in the financial services create demand for new innovations
rumen within the next few decades? sector. From banking to insurance, and services to protect society
Indications are that we could be on services are increasingly being against these threats.
the cusp of significant disruptions in delivered online. The move away
food and agricultural production. from cash is firmly in place, with The new decade presents the world
Visa and its closest peer Mastercard with unprecedented opportunities,
Demographic shifts are also enabling this through their global and investors who are willing and
disrupting how food will be networks by connecting consumers, able to take a long view and a
consumed in the future. Surging vendors and financial institutions. global perspective will be able to
middle-class growth and increasing Visa’s recent acquisition of Plaid is an participate in the fortunes created
consumer demand for transparency extension of this theme – a platform in the process of improving life on
and nutritious alternatives are that allows consumers to link their earth. While there will be failures
forcing the food industry to adapt. various financial accounts with encountered in the process, a good
This year, millennials constitute new fintech applications. Fintechs, dose of sceptic optimism and the
40% of all consumers and this on the other hand, are solving careful selection and diversification
generation is adopting digital behavioural problems, increasing of global companies should result in
solutions that provide instant access convenience and improving insights the creation of substantial wealth.
to the products and services they for financial services customers.
desire. Competition is intensifying When it comes to blockchain
as companies seek to build scale in technologies – the technology
serving the rapidly growing online that powers cryptocurrencies – our
food market. The failed bid by portfolio companies Visa, Accenture,
portfolio company Prosus for Just Bank of America and Microsoft rank
Eat is a case in point. Millennials in the top 10 patent holders. The
also show a preference for choosing technology – and to be clear, we are
brands and foods that come not referring to cryptocurrencies –
from sustainable sources and a holds the promise to revolutionise
conscious engagement with how the way financial transactions are
food is produced and the way it is conducted and recorded.
consumed. Nestlé and Starbucks are
two holdings within our portfolios
that are weaving this into their
business models.
1112
BANKING ON
INNOVATION
VICTOR MUPUNGA, RESEARCH ANALYST:
OLD MUTUAL WEALTH PRIVATE CLIENT SECURITIES
T
he origins of banking are widely believed to date back to around
1800 BC in Babylon. During that era, merchants were the archetype
of banks – serving as intermediaries between farmers and traders
who bartered soft commodities for other goods. Temples were soon
regarded as convenient and safe places to transact, a trend that became
prevalent with the advent of coins, which at the time were minted and stored
in temples. It was only during the Roman Empire’s reign (approximately
2000 years later) that banking became formalised and regulated with
money changers and lenders moving out of "houses of worship" into distinct
buildings. Fast forward another two millennia, and today we are witnessing
a reversal of this trend, with banks across the globe reducing their physical
footprints by closing branches as virtual (branchless) banks begin to gain
traction. Banking, as we have known it for centuries, is changing.
THE HISTORY OF BANKING
Regulatory change
Banks developed allowing formation of
in England large banks with multiple
Temples considered safe shareholders, led many
Bank of England small banks to merge
places for keeping money. founded in 1694 to
provide loan to govt.
The Romans formalised
banking within distinct First Bank of Emergence of
buildings United States Central Banks
set up in 1791 across the world
Goldsmiths issued Many small Japan: Meji
Banking revived in the a promissory note banks founded government's
Italian towns of Florence against deposits and in English attempt to
and Genoa began to lend provincial formulate banks
towns
AD 1100 - 1300 1400 1500 1600 1700 1800 1900 2000
1800 BC Collapse of Medici Bank took Sveriges Riksbank, First travellers China: Shanxi Increased global
Babylon's Roman Empire, banking to the next the world's oldest cheque issued merchants trade, development
idea of trade slumped level. Branched out of central bank, in England in created 'draft in technology and
banks and banks Italy into other parts of established in 1668 1772 banks' to financial regulations
temporarily Europe facilitate intl. helped proliferate
vanished trade banking and capital
market services
Bank of England
became the first Second Bank of
bank to issue United States Modern banking
permanent bank set up in 1816 began with the
notes in 1695 Bank Charter Act
of 1844
Source: Citi Research
13BANKING ON INNOVATION
THE STRUGGLE TO REMAIN RELEVANT Graph 1: European banks’ full-time employees
Innovation within the banking sector is certainly not
new, as there have been notable advances over the
last century. Consider the countless novel financial Forecast
3,600
products currently available or technology that was
3,200
transformative in its day: wired money transfers,
Automated Teller Machines (ATMs) and bankcards – all 2,800
Base - 23%
+11% -16%
of which have made our lives more convenient. However, 2,400
despite these advances, there is a strong sense that 2,000
Bull - 45%
traditional banking is somewhat broken and ripe for 1,600
disruption. This is regularly confirmed by numerous 1,200
surveys highlighting banking customers’ main gripes
2030E
2000
2006
2008
2009
2005
2004
2003
2002
2007
2001
2010
2016
1999
2015
2014
2013
2012
2017
2011
such as system downtimes, onerous paperwork, and
long queues in branches and on customer care hotlines. Source: ECB, Citi Research
According to analytics and advisory firm Gallup, only
30% of Americans have high confidence in their bank – a
number that has not improved much since 2008.
Graph 2: US number of branches
From the banks’ perspective, operating post the
Global Financial Crisis has been challenging, perhaps Biggest decline in
more so than for any other industry. Over the decade, 100,000
history
9.0
unspectacular economic growth and persistently low (or 90,000 Branches per 8.0
Number of branches
80,000 1,000 households 7.0
negative) interest rates have resulted in muted revenue 70,000 6.0
growth for the sector. On the cost side, ever-increasing 60,000 5.0
50,000 4.0
regulatory burdens i.e. compliance and higher capital
40,000 3.0
requirements have capped profitability at below pre- 30,000 Number of branches 2.0
crisis levels in most regions. Faced with these headwinds, 20,000 1.0
10,000 0.0
management teams have focused extensively on cost
2028E
2022E
discipline, and cuts in the number of branches and
2004
2010
1980
1950
2016
1968
1986
1998
1956
1962
1992
1974
employees have been the most visible consequences.
Source: Wells Fargo
A DIGITAL CHALLENGE
In contrast, banks have universally been allocating
more funds to their IT budgets, thereby accelerating
Graph 3: IT expenditure for South African banks
the shift from physical to digital delivery of banking
Rand Million
services. In the US, for example, the banking sector now
spends more on technology than any other industry 20 000
– approximately US$150 billion annually. Locally, each
16 000
of the big four banks (FirstRand, Standard Bank, Absa
and Nedbank) have steadily increased their annual IT 12 000
expenditure over the last five years, with IT now making
up an average of 21% of total expenses versus the global 8 000
average of 18%. While a portion of this expenditure is to
maintain the banks’ current IT systems, a growing share 4 000
is to better position them against the fierce competition
that has emerged from the banking sector’s newcomers –
FY14 FY15 FY16 FY17 FY18
challenger banks1.
Nedbank FirstRand ABSA Standard
Source: JP Morgan
1 A challenger bank refers to new competitors in the banking sector with a model that primarily uses technology and digital channels to deliver a better digital experience.
14According to KPMG, over one hundred challenger banks such as Zapper and SnapScan). MyBank assesses a
have launched globally over the last few years. In SA, client’s profile and historic cash flows and conducts
TymeBank and Discovery Bank launched last year, with continuous risk management on a real-time basis from
Bank Zero expected to be operational this year. To date, the client’s QR code, which results in comprehensive
two broad types of challenger banks have emerged data insight and personalisation of required services.
as competitors to the incumbents. The first group is
led by large technology companies such as Tencent, Evidently, the competition from Big Tech is formidable.
Alibaba and Kakao Talk (the South Korean equivalent Tech companies do not have to contend with legacy IT
to WhatsApp). The second group comprises standalone systems, large staff complements or costly branches.
fintech start-ups that use technology to streamline retail Furthermore, global tech companies have already
banking and offer clients better pricing and convenience. achieved both scale and brand recognition. Until now, we
have not seen Western tech giants venture meaningfully
THE THREAT FROM BIG TECH into any part of banking. However, it is worth noting that
Given technology companies’ extended reach, their foray Amazon provides credit to SMEs and individuals on its
and relatively fast success in financial services is not platform, but the capital is provided by a third party.
surprising. China’s Tencent and Alibaba provide a great Apple has a somewhat similar relationship with Goldman
Sachs for the Apple Card. Facebook’s recently conceived
example of this. Although Tencent-founded WeBank
plan to launch Libra, a digital currency, could also be
(the first digital-only bank to launch in China) received
viewed as a potential competitor to the traditional
its banking licence just five years ago, it managed to
banking system. A recent survey by McKinsey revealed
break even within just two years, having successfully that nearly two in three Americans would trust Amazon
penetrated Tencent’s large subscriber base. BNP Paribas to handle their financial needs.
recently valued WeBank at US$21 billion and due to
its asset-light model (no branches, tech usage and
MAKING THINGS HAPPEN
partnerships) the bank is more profitable than any other It is often said that simplicity is the ultimate
Chinese commercial bank and boasts a return on equity2 sophistication, an adage that rings true for standalone
of around 20%. challenger banks. While they don’t generally offer the
full range of complex products provided by traditional
incumbents, their ability to address consumers’ exact
WeBank’s key differentiator is how it has integrated
pain points has led to them rapidly gaining customers
the "ABCD" of tech innovation (Artificial Intelligence,
globally.
Blockchain, Cloud Services and Big Data) into its
operations. For example, 98% of inbound customer
queries are handled by a chatbot and identity The UK has seen the highest number of standalone
challenger start-ups. This is largely due to a favourable
verification is done via facial recognition on clients’
regulatory environment since 2013, when authorities
mobile devices. Credit assessments and loan
lowered barriers to entry into the banking sector as
applications are vetted using big data that leverages off
a means to reduce monopolies. Those start-ups that
Tencent’s social platforms, with an applicant receiving a were not overly reliant on capital markets for funding,
response immediately. As an additional revenue stream, were focused on a digital-only strategy, did not spread
the bank performs client credit and risk assessments for themselves too thinly and minimised operating costs,
other financial institutions, highlighting the superiority have excelled. They have managed to pass on the savings
of WeBank’s data processing capabilities. to customers via low (or zero) fees and favourable lending
rates. For the most part, SA’s challenger banks seem to be
following the same script.
Alibaba’s MyBank, an affiliate of Ant Financial, is another
example of a pioneering challenger bank. By leveraging
off Alibaba’s e-commerce platforms, MyBank is able to THE LOCAL LANDSCAPE
rapidly grow its market, which is focused on financing TymeBank, owned by African Rainbow Capital (ARC),
small to medium enterprises (SMEs). One of the bank’s has been making headlines for all the right reasons.
The bank recently celebrated its millionth client in less
standout innovations is its ability to collect and analyse
than a year after launching. A key reason for this is its
data from SMEs’ QR codes (the unique black and white
streamlined client on-boarding process – it takes under
machine-readable codes used by payment platforms
2 Return on equity (ROE) is a profitability ratio that measures a company’s ability to generate profits from its net assets. The average ROE in the 15 largest US banks by assets is 12.5%.
15BANKING ON INNOVATION
five minutes with no documentation to open a new app or website. Furthermore, 27% of total deposits were
account at Tyme kiosks, which can be found in Pick n completed via the mobile app, i.e. scanning a cheque
Pay stores nationwide. This is an impressive feat given using the bank’s app. The number of cheques written by
the rigorous SA FICA requirements. TymeBank uses its customers has declined by 40% to about 600 million
biometrics linked to the Department of Home Affairs in five years and the saving has been enormous. It costs
to authenticate applicants’ particulars. Importantly for the bank US$5 to process a cheque within a physical
our local market, the bank offers high interest rates on branch, US$0.50 at an ATM and US$0.05 via the
savings and transactions are either at no cost or notably mobile app.
lower than those of competitors. Given that competitor
local banks have lowered their bank charges in response
Despite these commendable exploits, there is a limit
to TymeBank’s growing client numbers, it is evident that
to how much traditional banks can do relative to new
the new entrants are disrupting the status quo.
entrants. The critical inhibitor is often their core banking
technology infrastructure, which was built decades ago
TymeBank’s immediate plans include venturing into and tends to operate in product silos. A simple example
personal loans, a segment of the market that continues of this is when clients update their personal details on
to experience high growth within the country. The bank their cheque account at a local bank branch but the
will get basket data from Pick n Pay that will feed into its update does not filter through to their mortgage account.
credit granting process and allow for real-time risk-based
pricing. The eventual goal is for loan disbursements to be This partly explains why manual intervention by branch
completed within two minutes, a high benchmark for staff tends to be high, which slows down the system’s
traditional banks to match. Management believe that the operating speed and increases costs and downtime – all
bank can break even with three million clients, which is the while frustrating the queuing clients. Making core
expected by 2022. system overhauls is too risky and almost impossible
without any downtime, which is why most legacy banks
will have to be content with gradual improvements to
Discovery Bank, the banking arm of Discovery Limited,
their clients’ digital experience.
poses a threat to legacy banks’ upper income customer
base. Discovery’s intention is to be a multiproduct
behavioural bank that links rewards, savings and lending Interestingly, some incumbents have opted to set up
rates directly to a clients’ financial habits. The group their own challenger banks that operate on different
already has about three hundred thousand credit technology stacks and are therefore better positioned to
card holders and over three million health insurance compete with start-ups. Marcus by Goldman Sachs, Hello
members. Much of the bank’s early success will rely on Bank by BNP Paribas and ING-DiBA are a few examples.
the extent to which it is able to convert these insurance In every aspect, these are challenger banks, but they
and credit card customers to bank clients. Initial have the advantage of being funded by the mammoth
migration has been slow, largely due to the bank balance sheet of a traditional bank. Nevertheless, this
on-boarding a limited number of clients a day – an does not necessarily guarantee success, particularly if
indication of the complexity in scaling its innovative customers fail to see the new bank’s key differentiator.
rewards framework across multiple sectors. As a case in point, JP Morgan recently closed its no-fee
digital service, Finn, which targeted millennials. The
reasons cited for Finn’s failure included slow customer
EMBRACING THE DIGITAL AGE TODAY,
uptake and little differentiation between the services it
TOMORROW, TOGETHER offered and what its parent company was pursuing on
In response to the changing dynamics within the sector,
the digital front.
traditional banks around the globe have been spending
significantly on technology to improve their customer
experience and increase their efficiency (i.e. lower costs SIMPLER, BETTER, FASTER?
and higher profitability). Just a decade ago, global banks were solely focused
on how they would recover from the depths of the
Global Financial Crisis. Today, how they compete against
Bank of America, the US’s second largest bank, is widely
new entrants and innovate their legacy businesses to
regarded as one of the most digitally savvy banks. In
meet their clients’ rising expectations is the key focus.
2018, the bank received more patents than any other
While reducing costs to streamline operations is always
competitor and more blockchain patents than any
laudable, the old adage “you can’t cost-cut your way
other company, globally. In the most recent financial
to prosperity” comes to mind. In our view, innovative
year, more than a third of mortgages and half of client
banks that strategically position their business models
direct loans were originated through the bank’s mobile
to compete with new sector entrants will be the winners
over the next decade.
16Graph 4: By country, bank efficiency is well correlated
with digital adoption
75%
70%
France
65%
60%
United States Canada
55% Brazil Spain
Efficiency
50% India Indonesia
45% Mexico Norway
Australia
40%
Singapore
35%
30% China
25%
30% 35% 40% 45% 50% 55% 60%
Online Adoption
Source: Wells Fargo
ISLAMIC FINTECH AND
FUTURE INNOVATION
Moosa Hassim, Investment Analyst at Private Client Securities
Islamic finance is one of the fastest growing branches and transparent. Some notable future avenues for
of international finance. Although current fintech innovation include using blockchain technology to
developments have been focused on the conventional enable smart contracts in Islamic finance, which would
finance industry, a number of projects have advanced assist in cutting costs of services significantly, with an
the Islamic finance landscape. immutable record of ownership and assets.
Islamic fintech has produced some stellar companies According to the 2019 Global Islamic Fintech Report by
including the likes of EthisCrowd.com, KapitalBoost. UK-based digital finance advisory firm, Elipses Group,
com and Wahed Invest. EthisCrowd.com is the world’s the top five expected growth sectors for 2020 are
first real estate Islamic crowdfunding platform and peer-to-peer and crowd funding, challenger banking,
focuses directly on social impact real estate projects blockchain, robo-advisory and digital personal finance
in Indonesia. KapitalBoost.com is Asia’s first Islamic management, as well as online and crowd lending.
peer-to-peer crowdfunding platform for SMEs; and Around 70% of Islamic fintechs are expected to raise
investment management firm, Wahed Invest launched equity funding this year with an average round size of
the world’s first Islamic RoboAdvice platform. US$7 million. Geographically, Southeast Asian countries
are expected to provide the highest growth potential
Previously, innovation in this specialist industry was in 2020 for Islamic fintech. The next strongest growth
focused on developing Islamic financial products that regions are the Middle East and the UK.
could compete with their conventional counterparts,
and for the most part, this has been achieved. The
next area of innovation lies in enhancing the digital
delivery of Islamic finance – making it more accessible
17SUSTAINABLE SUSTENANCE:
THE FUTURE
OF FOOD
SAMEER SINGH, RESEARCH ANALYST: OLD MUTUAL WEALTH
PRIVATE CLIENT SECURITIES
The human population has
doubled in under 50 years,
the percentage of people
living in extreme poverty has
declined from 42% to 10% over
the same period, and global
GDP per capita has grown
from US$871 to US$11 3121.
While a confluence of factors
have contributed to these
key strides, technological and
scientific progress in the field
of food production stand out.
1 World Bank Data, 2020
18In 2013, global thought leadership magazine, The Atlantic gathered 12
scientists, entrepreneurs, engineers and historians of technology to examine
and list the 50 most influential innovations since the widespread use of the
wheel (some 6000 years ago). From this list, eight relate directly to agriculture
and food production:
8 MOST INFLUENTIAL INNOVATIONS IN AGRICULTURE
1
Nitrogen fixation, 1918:
Fritz Haber wins a Nobel Prize for the
Haber-Bosch process, a method that
enabled the large-scale synthesis
of fertilisers and explosives. The 2
food production for half the world's
population involves this method for Refrigeration, 1850s:
producing fertilisers. Immensely improving the
preservation, safety and
transportation of food.
3
Green Revolution, mid-20th
century: 4
Combining fertilisers with
breakthroughs in plant breeding Moldboard plough, 18th
significantly impacted global food century:
production. Norman Borlaug, the This was the first plough that, in
Father of the Green Revolution, is addition to digging up soil, also
credited with saving over a billion turned it over, allowing for the
people worldwide from starvation. cultivation of harder ground.
5
Cotton gin, 1793:
6
Invented by Eli Whitney, the cotton
engine enabled a huge progressive
shift for agriculture and global Pasteurisation, 1863:
economics. The process of using heat to
eliminate pathogens and extend the
shelf life of certain consumables was
7 a significant breakthrough for public
health.
Scientific plant breeding, 8
1920s:
Gregor Mendel’s 1866 paper gives Combine harvester, 1930s:
life to early 20th century discoveries The mechanisation of farming
that expose the vital mechanisms of reshaped the landscape of global
plant breeding. food production and human
productivity.
Individually and in their respective periods, each of these innovations had
a significant impact on the societies around them. In aggregate, these
innovations produced first order effects responsible for the massive growth
in agricultural productivity experienced over the previous two centuries.
19SUSTAINABLE SUSTENANCE: THE FUTURE OF FOOD
A VICIOUS CYCLE Graph 1: World Agricultural Total Factor Productivity
The main source of agricultural
growth has changed from the 195
intensification of inputs (using
more labour, capital, and materials 175
per acre of land) to getting more
output from existing inputs. In this 155
way, agricultural productivity drove
135
growth and improvements across
societies on a global scale. As a 115
result of higher yields per crop and
increased food security, societies 95
saw increased population growth,
2009
2005
2003
2007
2001
1969
1999
2015
1965
1985
1995
2013
1963
1983
1993
1967
1987
1979
1997
1975
1973
1977
2011
1961
1981
1991
1971
greater life expectancy, higher
labour productivity owing to the
Source: US Department of Agriculture
shift from the agricultural sector
to the non-agricultural sector, and
greater disposal income due to
lower food prices. Graph 2: Lower food prices
How much food can you buy for working one hour in the manufacturing sector?
While we have much to be grateful
Eggs (1 dozen)
for thanks to the industrialisation 12%
of agriculture, it is becoming
evident that the benefits are giving 10% Flour (5 lbs)
rise to the Malthusian Trap2 i.e.
as our populations continue to Milk (1/2 gallon)
8%
grow, urbanise and gain greater
purchasing power, our needs and
6% Butter (1 lb)
demands move in lockstep, with
Pork chops (1 lb)
the requirement for sustenance
Bacon (1 lb)
being most critical. This is already 4%
Round steak (1 lb)
manifesting itself as an interwoven
collection of environmental and 2%
health-related complications that
potentially threaten the future
0%
viability of humankind and the 1901 1920 1940 1960 1980 2003
world. Source: US Bureau of Labour Statistics (2015)
According to the World Economic
Forum’s 2020 Global Risks Report,
the top long-term risks all concern
loop where climate change INTRODUCING MEAT 2.0
will affect every aspect of food Without a doubt, the hottest
severe threats to our climate. The
production3. We are at a crossroads property in the field of food
report lists biodiversity loss, climate
where the current methods and innovation is alternative protein,
action failure, extreme weather,
trajectory are not sustainable, i.e. any protein that replaces
human-made environmental
particularly in the context of 10 farmed animal proteins such as
disasters and natural disasters as
billion people on earth by 2050. beef, chicken, pork and lamb. The
being the most likely to materialise
However, just as in the past, rationale is obvious: agriculture
and having the greatest impact.
innovations in food production accounts for 24% of total greenhouse
are opening new possibilities and gas emissions and contributes even
Of these long-term risks, four can opportunities and are finding more to climate change when
point to agriculture as a significant solutions that, if promoted and considering land and water usage.
contributing factor. This is critical institutionalised, could transform the
considering the negative feedback way we consume.
2 The Malthusian trap or population trap is a condition whereby excess population would stop growing due to shortage of food supply leading to starvation. It is named
after Thomas Robert Malthus, who in 1798 suggested that while technological advances could increase a society's supply of resources, such as food, and thereby improve
the standard of living, the resource abundance would enable population growth, which would eventually bring the per capita supply of resources back to its original level.
3 The future of food and agriculture: trends and challenges. Food and Agriculture Organisation of the United Nations
20Most prominent in this space are is being recognised for its many inputs and customisation is 3D
plant-based proteins, driven by the advantages over traditional proteins. printed food. In its simplest form, 3D
massive success of predominantly Insects tend to be 60% protein, printing is a manufacturing process
two companies, Beyond Meat and contain vitamin B12 and possess where an object (in this case food)
Impossible Foods. However, plant- more calcium than milk. They also is built up layer by layer from a 3D
based proteins are nothing new, as contain more iron than spinach computer design. While originally
tofu and tempeh (both soy-based) and offer all the essential amino envisaged for manufacturing,
have been Asian diet staples for over acids a human body requires. The Netherlands Organisation for
two millennia. What makes this new Not only are they more nutritious, Applied Scientific Research (TNO)
wave of alternative proteins different but farming insects has many recently investigated printing
is that they are being made to taste advantages over animal protein: technologies applicable to food
like meat, are being marketed to higher feed conversion efficiency, production. The organisation found
meat eaters (as opposed to vegans), fewer greenhouse gases, significantly great potential for the layering
and aim to replace a percentage of less water and land are required, and of complete, multi-material food
real meat purchases. they pose a low risk of transmitting products from a collection of base
bacteria and viruses (think bird flu, ingredients. Even more exciting is
swine flu and mad cow disease). the work being done by Israeli start-
Beyond Meat and Impossible
In light of this, Netherlands-based up Redefine Meat Limited, which
Foods use unique recipes for
Protix recently opened the world’s is looking to create a 3D printer
their alternative proteins. While
largest insect farm. Another that can produce a meatless steak
the majority of their ingredients
company, French start-up Ynsect is that is so fatty and “meaty” that it
are similar (binding agents,
looking to trump Protix by becoming is indistinguishable from real steak.
preservatives, etc.), the key
the world’s largest insect producer, The allure 3D printing holds above
differentiator is the protein source
targeting 20 000 kg of protein a alternatives such as Beyond Meat
- Beyond uses pea protein and
year, equivalent to 80 000 kg of and cell-based meat cultivation lies
Impossible uses soy protein. This
beef. in the process of layering, where
“meatless meat” movement (also
factors such as texture and flavour
known as Meat 2.0) is fast gaining
can be controlled and concentrated
traction and niche start-ups are not A new frontier being explored is
more specifically around certain
the only ones joining the cause, with “clean meat”, also known as in vitro
parts of the food, somewhat like
well-established FMCG (fast-moving animals or, more commonly, lab-
the layers of muscle and fat in a real
consumer goods) companies such grown meat. As the label suggests,
steak.
as Nestlé, Tyson Foods, Smithfield, this meat is grown from stem cells
Perdue and Hormel all introducing extracted from donor livestock and
meat alternatives. The logic is simple: then cultured in a lab. The prospect HARNESSING THE POWER
until Beyond and Impossible came of cell-based meat has won over OF SCIENCE
around, plant-based protein was just many environmentalists owing A more contentious innovation is the
for vegetarians, who represented to its minimal impact on natural bio-fortification of crops, which is the
just 3% of the US population. Now, resources. However, the process is process of enhancing the nutrient
alternative meat has seemingly quite expensive, with 450 grams density of food crops through
gone mainstream, opening up a of beef costing US$2 400 in 2018. conventional plant breeding,
growing market that is largely driven Looking ahead, improvements in improved farming methods and/
by more environmentally conscious technology coupled with efficiency or genetically modifying plants.
consumers. Although it is still early gains are expected to drive costs The latter technique attracts
days, investment firm UBS projects lower. Some investors are already much attention as general public
growth of plant-based protein and convinced, with leading start- sentiment towards genetically
meat alternatives to increase from ups, Future Meat Technologies modified organisms (GMOs) is quite
US$4.6 billion in 2018 to US$85 and Finless Foods raising funds poor. The presence of multinational
billion in 2030. to take cell-made steak and fish chemicals and agricultural
mainstream. companies that are involved in GMO
production, such as Syngenta, Bayer,
A PALATABLE
DowDuPont and BASF, has done
ALTERNATIVE? PRINT YOUR STEAK AND
little to alleviate concern. Regardless
While plant-based protein options EAT IT
of technique, bio-fortification has
are currently getting all of the Another innovation less associated
been successful at addressing
attention, insect protein is gradually with alternative proteins and more
mineral malnutrition and food
increasing in prominence and focused on the optimisation of food
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