Monday, 29 October 2018 20:08

Financial services firms face uncertain future: report

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Financial services firms face uncertain future: report Image courtesy of Sujin Jetkasettakorn at FreeDigitalPhotos.net

By 2030, 80% of heritage financial services firms will go out of business, become commoditised, or exist only formally, but not competing effectively, according to a newly published analyst report.

The report, by Gartner, also cautions that these financial services firms will struggle for relevance as global digital platforms, fintech companies and other non-traditional players gain greater market share, using technology to change the economics and business models of the industry.

Speaking at Gartner Symposium/ITxpo 2018 on the Gold Coast on Monday, David Furlonger, vice-president and distinguished analyst at Gartner, said banks faced a growing risk of failure if they continued to maintain 20th century business and operating models.

“Digital transformation is largely a myth as institutional mindsets, processes and structures stand firm,” said Furlonger.

“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.”

According to Gartner’s 2018 CEO survey, while financial services CEOs continue to prioritise revenue growth, there has been a clear shift toward emphasising efficiency and productivity improvements and the importance of management as growth levers.

Gartner says this shift indicates that digital business is “predominantly a channel and transaction automation play, focused on business optimisation as opposed to a transformation”.

According to Pete Redshaw, practice vice-president at Gartner, 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, Gartner says that 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.

And equally, peer-to-peer consensus algorithms can directly match borrowers to those with money, without requiring a bank to mediate, Gartner notes.

“The biggest mistake financial services CIOs make is putting too much focus on technology,” said Redshaw.

“They should push their organisations for a more coherent response to digital business – it’s important to set the digital vision and destination first, then think about how to lead an organisation there.”

According to Gartner, of the 20% 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 (5%) 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. They will participate in digital platforms, but will not own them. Less than 15% 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%  of winning traditional financial services providers can become long-tail firms.

Gartner says that the speed of digital transformation in financial services partly depends on regulation, as well as customer demographics and behaviours, which will vary from country to country.

In some nations, conservative regulations will inhibit innovation, while other countries, such as Australia, Brazil, China, India and the UK, will use regulation to speed transformation, Gartner concludes.

To access the Gartner report click here.

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Peter Dinham

Peter Dinham is a co-founder of iTWire and a 35-year veteran journalist and corporate communications consultant. He has worked as a journalist in all forms of media – newspapers/magazines, radio, television, press agency and now, online – including with the Canberra Times, The Examiner (Tasmania), the ABC and AAP-Reuters. As a freelance journalist he also had articles published in Australian and overseas magazines. He worked in the corporate communications/public relations sector, in-house with an airline, and as a senior executive in Australia of the world’s largest communications consultancy, Burson-Marsteller. He also ran his own communications consultancy and was a co-founder in Australia of the global photographic agency, the Image Bank (now Getty Images).

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