Davos 2016: Oliver Wyman report on modular financial services
Financial services will become “modular”, with digital distribution platforms, new product providers, alternative sources of capital and a growth in outsourcing fundamentally reshaping the industry. This is according to Modular Financial Services: The New Shape of the Industry, a new report by global management consultancy Oliver Wyman.
The Oliver Wyman study estimates that this change could impact $1TN of revenues and costs in banking and insurance 17% of current $5.7TN revenues. New customer platforms could capture $50-150 BN of revenues from today’s banking and insurance markets, equivalent to several eBays or 1-2%+ of banking and insurance revenue today.
Consumers will benefit most from modular financial services. They will be able to access a wider range of product providers, and the increase in competition will drive margin compression. The report estimates that $150-300 BN of value, equal to 2-4% of today’s revenues, 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 $150-250 BN of existing revenues.
“Modular financial services are emerging at different speeds across markets. Currently, banking in the US is more modular than in Europe and Asia. Property & Casualty insurance has become more modular than Life insurance. Now, the modular industry structure will go deeper and spread to new markets,” said Oliver Wyman Partner and co-author, Matt Austen. “Since the crisis, most firms have focussed on optimising their existing, integrated business model. Now, the industry is going to move towards a new, modular structure.”
The report highlights 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 $340BN.
Oliver Wyman’s Managing Partner for Financial Services, Ted Moynihan, added: “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.”
The Oliver Wyman Modular Financial Service report is available here.