By 2030, some 80 percent of heritage financial services firms will go out of business or become commoditised, according to research house Gartner, Inc.
Speaking at Gartner Symposium/ITxpo 2018 on the Gold Coast, Australia today, David Furlonger, VP and distinguished analyst at Gartner said this overwhelming risk of failure comes as many continue to maintain “20th century” operating models.
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“Digital transformation is largely a myth as institutional mindsets, processes and structures stand firm,” Furlonger said.
“Established financial services providers will have to move faster on digital business by building digital platforms or finding niche products and services to sell on others’ platforms.”
It’s a position many analysts agree with. A 2018 financial services outlook from Deloitte, for example, notes: “Long-term sustainable growth in the banking industry seems only possible with a radical departure from a sales- and product-obsessed mindset to one of genuine customer centricity, and further rationalisation of strategies to target the right markets, customer segments, and solutions.”
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According to Gartner’s 2018 CEO survey, while financial services CEOs continue to prioritize revenue growth, there has been a clear shift toward emphasising efficiency and productivity improvements and the importance of management as growth levers.
“This shift indicates that digital business is predominantly a channel and transaction automation play, focused on business optimisation as opposed to a transformation.”
Pete Redshaw, practice VP at Gartner, said this attitude is dangerous.
“It underestimates the degree of change that digital technology will bring to the industry,” he said. “The future of the financial services industry is increasingly weightless, requiring few physical assets to establish or maintain a presence. That makes the industry especially vulnerable to disruption by digital competitors.”
In addition, emerging technologies (such as blockchain) offer transformational opportunities by creating trust between parties that do not know each other, without intermediary relationships that incumbent financial firms cultivate. Equally, peer-to-peer consensus algorithms can directly match borrowers to those with money, without requiring a bank to mediate.
Financial Services Firms: Three Types Will Flourish
According to Gartner, of the 20 percent of traditional firms that will remain as winners, three types will flourish:
- “Power-Law” Firms
Companies that own a digital platform will use its scale, low-cost infrastructure and the customer information it generates to create new services and enter new markets. Very few (five percent) of these winning heritage institutions have the ability to become power-law firms.
- Fintechs
Individual companies or pure-play/neobank subsidiaries will disaggregate traditional financial services in discrete product areas, Gartner says. They will participate in digital platforms, but will not own them. Less than 15 percent of the winning group of traditional firms can convert themselves into or successfully spin off fintechs.
- Long-tail firms
The dramatically lower costs enabled by digital platforms will allow some traditional providers to act as service brokers. This is likely for large populations of poor and working-class people around the world that were not profitable customers previously. Simultaneously, they can act as concierge providers of bundled offerings to high-net-worth individuals. Around 80 percent of winning traditional financial services providers can become long-tail firms.