Financial services are becoming “modular”, as digital distribution platforms, new product providers, alternative sources of capital and a growth in outsourcing fundamentally reshape the industry, according to Oliver Wyman.
A report issued by the global management consultancy, entitled ‘Modular Financial Services: The New Shape of the Industry’, estimates that the change could see US$1 trillion of revenues and costs shift in banking and insurance – an industry currently with US$5.7 trillion of revenues.
New customer platforms could capture US$50bn to US$150bn of revenues from today’s banking and insurance markets, equivalent to several eBays or 1-2%+ of current banking and insurance revenue.
The report predicts that consumers will benefit most from modular financial services and will be able to access a wider range of product providers, while increased competition will drive margin compression. An estimated US$150bn to US$300bn of value may migrate to consumers by way of lower prices. Innovative business models based on new technology will capture share, with the potential to capture a further US$150bn to US250bn of existing revenues.
“Modular financial services are emerging at different speeds across markets,” said Oliver Wyman partner and report co-author, Matt Austen. “Currently, banking in the US is more modular than in Europe and Asia. Property and casualty insurance has become more modular than life insurance. Now, the modular industry structure will go deeper and spread to new markets.
“Since the crisis, most firms have focused on optimising their existing, integrated business model. Now, the industry is going to move towards a new, modular structure.”
The report’s authors note that large, integrated financial services firms still enjoy significant competitive advantages – including existing customer relationships, secure at-scale operations and meeting the requirements of regulatory compliance – and are still well-positioned to succeed. However any costly, inflexible legacy infrastructure will be unsustainable and competition will force a significant overhaul of incumbents’ operating platforms.
The report estimates target cost savings for the world’s largest banks may need to be as much as US$340bn. The cost of “replatforming” this group is substantial, potentially more than US$4bn each and exceeding the average annual dividend paid by the 100 largest universal banks of US$1.7bn.
“Even if we do not expect a completely modular financial services sector, the way customers buy financial services and how firms deliver them is going to be transformed,” added Oliver Wyman’s managing partner for financial services, Ted Moynihan.
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The industry needs to digitise its core businesses, cuts costs and create increased shareholder value, concludes a report from Oliver Wyman.
An upgrade for the US, Europe and Japan is offset by downgrades for Mexico and other major emerging economies.