Heritage financial firms under threat

“Digital transformation is largely a myth as institutional mindsets, processes and structures stand firm,” said Mr 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 emphasizing 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 vice president 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.

“The biggest mistake financial services CIOs make is putting too much focus on technology,” said Mr 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 per cent 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 per cent) 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 per cent 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 per cent of winning traditional financial services providers can become long-tail firms.

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.