Despite the enormous changes in the financial services industry in recent years, the large incumbent banks, insurers, and asset managers still dominate the provision of financial services.
A plethora of significant new players are emerging, including fintech startups , established payment, technology, and information firms, telecoms, and other providers, and are eyeing attractive parts of the broader financial services industry. However, few of these firms appear willing or able yet to take on the incumbents on the core provision of highly regulated financial services, at significant scale.
So, the question for us is not really whether the financial services incumbents will exist in five to 10 years, but whether they will thrive.
How competitive pressures are reshaping financial services
This question of how financial services incumbents will fare is far from settled. For several years after the crisis, the agenda of the incumbents was dominated by restructuring and regulatory reform. In recent years, though, large financial services firms have increasingly focused on digital change: embracing mobile channels, redesigning customer experiences, partnering with innovators, using cloud computing, exploring new datasets and analytic tools, and digitizing stubbornly inefficient processes.
Yet these efforts sit within a much larger structural shift: the industry is becoming increasingly modular, with value migrating toward firms that control customer interfaces, data, and specialized components rather than traditional balance sheet centric models.
Why digital change is no longer enough for financial institutions
While many financial services firms are eager to explain these digital initiatives to their customers, employees, and shareholders, very few firms have articulated a “digital equity” plan: a clear view of how their investments are going to generate future shareholder value in a digital, modular world.
This lack of digital equity plans is consistent with the shifts in valuation we have observed over the last five years. The largest global banks and insurers saw shareholder value grow by an average of 10% per year. In contrast, major fintech firms (new and old) delivered value growth at more than twice that rate — above the spectacular returns of the leading tech industry giants.
This divergence reflects deeper value migration: capital light, data rich businesses are capturing disproportionate growth, while incumbents risk being pushed into lower margin utility roles if they fail to adapt.
The emerging drivers of value in a modular financial industry
We believe it is time for financial services incumbents to articulate their own digital equity plans. In our State of Financial Services 2017 report, we contrast three examples of such plans and use them to surface what we see as the emerging drivers of shareholder value in a digital, modular industry. These drivers reflect where value is migrating and what will determine competitive advantage in the years ahead:
- Control of the customer interface and the data it generates
- The ability to operate as a modular, component based business
- Scalable economics built on technology, analytics, and capital light models
We offer perspectives on how incumbents can identify new sources of value and how they can transform to capture them. This includes understanding the attacker archetypes reshaping the market, the regulatory forces accelerating competition, and the strategic choices required to compete effectively in a modular financial ecosystem.
