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Finance sector faces its Uber moment
Some of the world’s largest finance sector companies are reviewing their business models following the rapid growth of fintechs, according to research by Deloitte for a World Economic Forum report.
More than 300 global institutions participated in the research which identifies the six areas expected to be most affected over the coming decades:
- Deposits and lending
- Financial markets
- Investment management
- Capital raising
The Future of Financial Services: How disruptive innovations are reshaping the way financial services are structured, provisioned and consumed also draws on more than one hundred interviews with industry experts.
In a series of workshops, executives from global financial institutions, including UBS, HSBC, Deutsche Bank, Barclays, Visa and MasterCard, met with leading global fintech innovators, including Zopa, Funding Circle, Transferwise and Ripple, to discuss the future of the industry.
Disruption in the financial sector is accelerating. Last year, US$12.2 billion was invested globally in the fintech sector – more than treble the investment in 2013. And as new entrants lay claim to more and more of the estimated US$6.6 trillion on revenues at stake in global retail financial services, this is creating continuous pressure to innovate.
For decades, banks and insurers have employed similar, highly profitable business models. But those models are now under pressure from fintechs with agile technology that can deploy innovative online platforms from small capital bases. These fintechs are also making strategic use of data to acquire customers and revenues at a fast pace.
Changing customer behaviours have demanded innovations from their service and transaction providers. They have responded and are now seriously looking at ways to re-shape their business models and extend their structures over the long-term to ensure the sustainability of the financial services industry.
However, while innovators are forcing incumbents to change for the benefit of the consumer, many large financial institutions are their offerings and identifying opportunities to collaborate with new players.
The tremendous opportunities to reinvigorate the financial services industry and anticipate customer needs to create shared value, pivot on three key approaches:
- Embracing innovation to build ecosystems
- Operationalising agility
- Ruthlessly attacking sources of friction or frustration for customers.
The World Economic Report report points out key similarities in the strategies being employed by successful disruptors, such as Future Advisor, Lending Club and others. Marketplace lending platforms like Lending Club – which captured market attention with a US$5.4 billion IPO - threaten banks core deposit and lending functions. Automated wealth advisors like Future Advisor are also contributing to the rapidly eroding margins on core wealth advisory services.
The six key insights that arose from our research were:
- Innovation in financial services is deliberate and predictable; incumbent players are most likely to be attacked where the greatest sources of customer friction meet the largest profit pools
- Innovations are having the greatest impact where they employ business models that are platform-based, data intensive and capital light
- The most imminent effects of disruption will be felt in the banking sector. How-ever, the greatest impact of disruption is likely to be felt in the insurance sector
- Incumbent institutions will employ parallel strategies, aggressively competing with new entrants while also leveraging legacy assets to provide those new entrants with infrastructure and access to services
- Collaboration between regulators, incumbents and new entrants will be required to understand how new innovations alter the risk profile of the industry, positively and negatively
- Disruption will not be a one‐time event, rather a continuous pressure to innovate that will shape customer behaviours, business models and the long‐term structure of the financial services industry.
The next focus of this research will be on deep¬ening our understanding of the potential use of cases for decentralised systems such as the block chain – the internet of transactions - within and between financial institutions and building a blueprint for a global standard for digital identity that will enable, simplify and de‐risk global transactions.
This article was first published in Asia-Pacific Banking & Finance.