Finance sector faces 'uber-moment'
New WEF report forecasts innovation to become part of the DNA of financial services industry
Singapore, 6 July 2015 — Some of the world’s largest finance sector companies are reviewing their business models following the rapid growth of “fintech” entrants in the sector. That is the main finding of a World Economic Forum report entitled “The Future of Financial Services: How disruptive innovations are reshaping the way financial services are structured, provisioned and consumed”. The report was developed in conjunction with Deloitte Consulting LLP in the U.S., an entity within the Deloitte network.
The report draws on over one hundred interviews with industry experts and a series of workshops where executives from global financial institutions like UBS, HSBC, Deutsche Bank, Barclays, Visa and MasterCard met with leading global fintech innovators like Zopa, Funding Circle, Transferwise and Ripple to discuss the future of their industry.
“For decades, banks and insurers have employed similar, highly profitable business models. But they realize those models are coming under pressure due to fintech innovations” says R. Jesse McWaters, lead author of the report at the World Economic Forum. “Financial technology companies are deploying online platforms, have small capital bases, and make strategic use of data, to acquire customers and revenues at a fast pace. Banks and insurers noted that, and are contemplating their response.”
With global investments of $12.2 billion in 2014 in the fintech sector, more than threefold compared to 2013, disruption in the financial sector is not a one-time event but rather a continuous pressure to innovate as new entrants lay claim to more and more of the estimated $6.6 trillion on revenues at stake in global retail financial services. “Innovation will shape customer behaviors, business models, and the long-term structure of the financial services industry. Banks and Insurance firms are already starting to see the effect of disruptors, and we believe much more is to come” says Chris Harvey, Deloitte Global Leader, Financial Services.
However, while innovators will force incumbents to change – often to the benefit of the consumer - it doesn’t necessarily mean that the brand names we know will be disappearing. “Many large financial institutions are highly focused on responding to disruption” says Giancarlo Bruno, Head of Financial Services at the World Economic Forum “incumbents are learning from challengers, adapting their offerings and identifying opportunities to collaborate with new players”.
“When we look at the disruptive potential of innovation, we should not only consider the threats, but also the tremendous opportunities to reinvigorate our industry and become more relevant for our customers. Ultimately, the companies that emerge victorious will embrace innovation to build ecosystems, operationalize agility, and ruthlessly attack sources of friction for their customers,” adds Rob Galaski, Banking & Securities Leader, Deloitte Canada.
The 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 markets attention with a $5.4 billion IPO - threaten banks core deposit and lending functions. Automated wealth advisors like Future Advisor are contributing to the rapidly eroding margins on core wealth advisory services.
Looking at Asia, Mohit Mehrotra, Consulting Partner, Deloitte Southeast Asia says, “The Fintech sector is not formally defined in Asia but it is estimated within the community that the investment volume in Asia is approximately between USD800 million to USD1 billion. Given the increased interest in this space not just by private Venture Capital (VC) funds and state owned funds but also increasingly by bank owned VC funds, clearly this is the space which will continue to attract lot of new investments in the region.”
“It is very challenging for financial institutions in the region given the pace of change in the digital world. Financial institutions need to deal with multi-generational customers i.e. on one end, there are the digital natives (young consumers and digital businesses) and on the other end, there are the many that are unbanked (about 40% of world's unbanked reside in Asia) which includes consumers and Micro, Small & Medium Enterprises (MSMEs). This is coupled with additional pressures such as implications of ageing Asia and slowdown in growth of many economies in the region. We believe the big impact is expected to be felt around six key themes spread across multiple innovation clusters and various functions in financial services - streamlined infrastructure, automation of high value activities, reduced intermediation, role of Data, niche/specialised offerings and customer empowerment.”
For Singapore in particular, Mr Mehrotra says, “Countries that foster innovation and support broad scale execution of innovation are expected to be winners in the digital world. There is a lot of competition for pole position in the digital world, not just at a country level but also at a city level. Singapore has done well in maintaining its competitiveness in the "physical" economy with world class infrastructure and many other key enablers. The financial services sector is an important contributor to Singapore's GDP and a key source of jobs in Singapore. However as the world transforms towards a digital economy, Singapore needs to maintain its competitive position where financial services sector will be one of the key enablers. It will help the country continue to attract high quality jobs that will drive the economy. Singapore is supporting the growth of this area through various state owned programmes that foster growth of incubators/accelerators, direct investments by sovereign wealth funds and attract leading FinTech VCs in the country.”