Conditions are ripe for traditional financial services businesses to snatch back market share lost to more nimble technology players over the last decade, global consultancy firm, Oliver Wyman, argues in its latest annual review of the sector.
The 2022 ‘State of the financial services industry’ paper says monetary tightening combined with flagging tech valuations opens up opportunities for establishment firms to reassert control – or at least stop the rot that has seen fintechs undermine existing business models.
“As of today, we have yet to see a decisive pivot from many of the incumbents toward providing existing or new customers with new services,” the Oliver Wyman report says. “Yet rising interest rates and volatile share prices in technology markets could change the dynamics of the past few years.”
Higher rates should see margins improve for traditional financial providers, giving them breathing space to fend off challengers or even launch an offensive.
“There will be consolidation in fintech, presenting opportunities for stronger firms, including incumbents, to roll-up. The nature of customer trust is changing,” the paper says.
But the report details a financial services sector much changed in the space of just a decade as technology-enabled firms have grabbed low-hanging fruit, especially in customer-facing segments such as payments.
“As a result, a new, wider financial services industry has emerged, in which incumbent players such as banks, insurance companies, and asset managers have shrunk as a proportion of the total from 90% of the industry value 10 years ago to about 65% of the industry value today,” the Oliver Wyman paper says.
“Big tech and other merchants active in financial services, as well as a wide group we refer to as FITs firms — financial infrastructure and technology companies — now account for 35% of the aggregate financial services industry value.”
Weighed down by regulatory capital constraints, incumbent firms have seen aggregate annual growth of 3 per cent over the last 10 years compared to “capital-light” challengers that grew an average 10 per cent year-on-year during the same period.
“This shift shows up in winners and losers — nearly one third of the largest financial institutions are now FITs firms, up from only two a decade ago,” the report says.
Overall, Oliver Wyman estimates establishment financial firms added about US$1.7 trillion in value during the last 10 years, equating to just under half the US$3 trillion accruing to the new-breed companies (even accounting for the 2022 valuation crash in the sector).
With the incumbent-challenger dynamic now poised at a turning point, the paper lays out four possible outcomes as circumstances unfold:
- capital-light firms continue to expand (albeit with consolidation in the sector) while incumbents morph into low-margin utilities;
- market-driven rebalancing – a dot-com style crash driving further consolidation among established firms that partner with fintechs to deliver services;
- policy-driven rebalancing – greater regulation forcing tech firms into line with incumbents; or,
- a ‘trust-busting’ crisis – a significant meltdown causes “dramatic loss of trust” across incumbents and challengers alike. Historically linked to over-leverage, a new-age crisis may emerge from cyber or privacy breaches.
Despite the increasing uncertainties in the sector, the Oliver Wyman study suggests the financial services sector is well-placed to withstand any systemic volatility.
“By no means are we calling the end of financial crises. The build-up of leverage in the economy after a decade of cheap money is concerning, and as most banks look at the future scenarios, stagflation — low economic growth combined with underlying inflation — is a very challenging possibility for economies and could spark credit deterioration,” the report says. “Yet the evidence is that the financial system is in better shape than at any time in recent memory to manage and continue to support economic growth.”
Oliver Wyman is part of the US-listed Marsh McLennan group that also includes Mercer.