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The Spear Versus the Shield

Which will lead the industry?

Posted by Jim Eckenrode, executive director, Deloitte Center for Financial Services, Deloitte Services LP, on June 25, 2013

The Chinese word for paradox, maodun, literally means “spear-shield.” Its origin is found in a third-century parable involving a weapons maker who claims to have both an impenetrable shield and a spear that can pierce any armor. When he is asked if his shield can deflect his spear, he is stumped for an answer.

This story is also widely viewed as the origin of the “irresistible force and immovable object” paradox, which I think is one that the financial services industry is facing at the current time. In the financial services industry, the irresistible force, the spear, if you will, is the relentless progression and adoption of technology-based innovation, while the immovable object, the shield, is the increased level of regulation.

Financial institutions are wrestling with these challenges: while they are making some difficult choices regarding effective use of capital and the businesses they want to compete and win in, they are also exploring how they can establish meaningful competitive advantage in the businesses they choose to keep. In many instances, this is likely to require innovative thought. 

At the same time, new entrants of all types — start-ups, established technology and online companies, and even fraudsters — are exploring how to disrupt well-established business models in financial services, largely through technology-based innovation. Whether in payments processing, information delivery, or stealing online account information to withdraw millions of dollars, these new entities are unencumbered by legacy technologies and are often able to develop innovative value propositions that may be beyond the current abilities of incumbents to develop or stop. 

On the other hand, regulators are ramping up their efforts to examine, oversee, and control. In terms of legitimate new entrants, we will have to wait and see when these companies are viewed as a new class of financial firms and regulated in the same ways as traditional firms. For the less-legitimate, regulators and financial institutions should work together to stay one step ahead of the game.

A vexing problem, for sure. But will the industry be stumped like our Chinese weapons maker? Which will have more influence in the coming years: innovation (the spear) or regulation (the shield)?

Well, as a rough-and-ready proxy for the pace at which technology is developing, let’s look at data creation. I recently heard a presentation by futurist Vito DiBari in which he cited some interesting statistics. According to one study, if one were to take the sum total of all data spoken or written by humankind since at least the development of cave painting until 2002, one would need approximately five exabytes of storage (an exabyte being one billion gigabytes). Rather a lot, really. And then, we created another five exabytes in the next year. From 2003 until this year, 1,000 more...and it’s projected that, with continued development and deployment of chip technologies, sensors, and communication platforms, over the next 10 years more than 250,000 exabytes of data will be at our fingertips. 

On the other hand, financial services institutions may have spent the last decade discussing, attempting, or just plain avoiding initiatives to address critical technological vulnerabilities based on aging platforms. At the same time, regulators and regulation evolves when it comes to addressing important financial and security vulnerabilities facing the industry. Take Dodd-Frank, for example. First proposed in 2009, the final act encompasses a set of almost 400 rules spanning a wide range of financial services activities. Of these 400, only about 40 percent have finalized rules as of this month. 

It seems to me that the spear is in the lead, either from the positive perspective of new idea creation or from the negative perspective of vulnerabilities and threats. Executives and regulators alike may need to control the impenetrable shield or they might miss the mark on the next big thing or protecting the future of their organization.

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