A tectonic shift is occurring in the financial services industry, as technology companies jostle with incumbent firms for position in a market that is expanding rapidly into new services, according to global management consulting firm Oliver Wyman. Established firms traditionally organized around managing risk are still growing, but most of the industry’s value creation is being driven by financial infrastructure, data, and technology (FIT) companies.
In its 24th annual State of the Financial Services Industry Report, titled The Tectonic Shift Between Risk, Data, and Technology, Oliver Wyman states that the primary driver of this value shift is the slowing growth of more capital-intensive risk intermediation services, which have been growing at about 3% a year over the last decade, compared with capital-light services linked to connected data services and value technology services, which have been growing at about 8% a year.
As a result of this ongoing shift, nearly one-third of the world’s largest 50 financial institutions are now FITs firms, up from only two a decade ago.
“The financial services industry has had a good decade — no major crisis, a huge amount of innovation, and playing an important societal role in COVID and on climate,” said Ted Moynihan, Partner and Global Head of Financial Services at Oliver Wyman. “The decade has also seen a dramatic change in the financial services landscape, to a wider industry with more firms acting in co-opetition with each other, and overall a shift in relative value from incumbents to new players. With rising interest rates and volatile markets, we anticipate quite different conditions in the next few years, with the benefits going to those firms that can anticipate and pivot to the new sources of value growth.”
The Oliver Wyman State of Financial Services 2022 report shows that without more action, this shift in relative value is poised to continue. Most incumbents are struggling to find a decisive way to reorganize around, and invest effectively in, the changing sources of value and growth in the industry.
As big tech business models converge, mobile wallets and moves into embedded finance will become more prominent, according to the report, as the emergence of digital assets and digital identification amplify and accelerate the value shift.
That said, current market and economic conditions may provide an opportunity for incumbent firms to regain share. Rising interest rates should deliver an earnings boost to some banks and insurers, and investors are challenging some big tech and FITs firms’ business models. If incumbents can pivot more decisively toward new sources of value and invest earnings carefully, there are significant opportunities.
In addition, the 2022 State of Financial Services report finds that while the top incumbent firms in the industry have increased their market value by 70% over the past decade, delivering $1.3 trillion in new value, a combination of large financial infrastructure, data, and fintech firms have delivered 400% value growth and nearly $2.3 trillion of value. Essentially, more total value is being created outside the incumbent industry, from firms that purport to be in similar ecosystems with the incumbents. And $9 trillion in new value has been created by the big tech industry – even with the significant adjustments in 2022 – which is increasingly moving into financial services through payments initially but is expanding to provide many other financial services.
Additional Key Findings:
- Since the global financial crisis, the financial system is much better positioned to play the economic shock absorption and policy transmission role for which it is at least partially underwritten by governments — as seen in the responses to COVID-19, in the war in Ukraine, and on climate.
- Big tech companies remain keen to grow in financial services without expanding too far into the core risk intermediation value pools in financial services. Oliver Wyman expects another wave of partnerships as they focus on further embedding a company at the center of the lives of the customer, and bringing commerce, advertising, and other services to the customer through greater accumulation of connected data and delivery of valuable technology.
- Oliver Wyman expects significant consolidation in the FITs landscape, not least as rising interest rates and volatile markets result in a shakedown of firms without enough earnings stability.
- Despite recent volatility in stablecoins, decentralized finance and digital assets are likely to drive profound changes to the structure of financial services due to the underlying benefits from more efficient infrastructure and the scope for greater inclusions. The timing and extent of change from digital assets will depend a lot on the path of regulation.
- Disintermediation is not the only risk; an ever-increasing misalignment of the oversight and cost of risk management with the value growth from connected data and value technology in the industry inevitably poses risks. Other industries, such as autos, healthcare, energy, and telecom, mirror the same challenges of managing a mature asset-intensive suite of traditional products and services while trying to re-focus on value growth.
- Structures that allow private capital to invest in the myriad opportunities facing incumbents stand to benefit, and public-to-private may even be part of the future of some of these firms.
To view the Oliver Wyman State of the Financial Services Industry 2022 Report, click here.