The Nature of the Ecosystem

By January 28, 2015Blog

The future of financial services – and of many other industries – will be a future dominated by dynamic, overlapping ecosystems – of people, businesses and companies – where the winners will have innate resilience and adaptability as defining characteristics. These ecosystems will initially be constructed in terms with which we are familiar, but in time will likely give rise to new forms – both legal and organic – of organisational units. 

Transitioning from the ‘corporation-centric’ Industrial Age to the ‘ecosystem-centric’ Information Age is one of the most important challenges the financial industry and its leaders face over the coming decade. Fortunately, elements of this new paradigm are historically embedded in the financial services landscape, and the Cambrian Explosion of new, innovative financial services startups is an ideal vector through which to catalyse and accelerate this necessary transformation.

In 1937, Nobel Prize winning economist Ronald Coase published his seminal paper on the ‘Nature of the Firm’ seeking to explain why companies existed. Coase’s thesis was that mitigating informational and transaction costs was the key driver of company formation and growth: by combining people and activities within one firm, these costs could be minimised or eliminated, thus producing a net gain that underpinned the economic logic of firms (and dictated their optimal size). Combined with Taylorian concepts of ‘scientific management’, these ideas gave intellectual support to the rise of the archetypal ‘Industrial Age’ corporation. 

Furthermore, theories pertaining to competitive advantage and specialisation supported this growth and the formation of networks of companies and businesses. Applying Coase’s theory today, in a competitive environment where information and transaction costs are trending ever closer and ever more often to zero, it is likely that many of the advantages enjoyed by traditional, 20th century corporations are disappearing and/or are no longer sufficient to overcome the additional costs of complexity and inertia that these organisational forms impose.

In their place, we are likely to see the emergence of more loosely-coupled networks and ecosystems taking full advantage of this new environment to harness both the efficiencies of low informational costs and the innate adaptability that arises from their ability to more easily re-configure themselves in the face of a constantly changing competitive environment.

Given the nature of the financial industry, examples of such networks already exist – and in some cases have for centuries. Networks of correspondent banks, re-insurance markets, and payment and clearing infrastructures (Visa, Swift, Euroclear) are all examples of this. No financial service firm – however big – can operate without relying on and participating in a broader network.

However it is worth noting that these existing ecosystems are mostly found only at the ‘infrastructure’ layer of the industry. To succeed in the 21st century, financial services firms – big or small – will need to get used to the idea of analogous ecosystems emerging across their business stack, from front to back; and for these same ecosystems to evolve and change continuously. The Information Age financial services landscape will be one of APIs and SDKs, of opportunistic partnerships and strategic openness. 

This is why it is critical that all of the financial industry’s actors – incumbents, startups, executives, engineers, regulators – recognise this and make building these ecosystems a priority. Fundamentally, this is about changing cultures. And since culture is an emergent property of groups of people, this change will need to be led by people.

Successful, self-sustaining ecosystems do not arise by edict. They need to be built. Peer to peer. Business by business. The future leaders of 21st century finance will be those who embrace this challenge and who can compete fiercely while at the same time building and nurturing the wider ecosystem in which they operate.

Originally published on TechCity News.