‘Modular’ financial services set to benefit consumers
Financial services are becoming “modular”, with digital distribution platforms, new product providers, alternative sources of capital and a growth in outsourcing likely to reshape the industry, according to a new report by global management consultancy Oliver Wyman.
The Oliver Wyman study Modular Financial Services: The New Shape of the Industry estimates that this change could see $1 trillion of revenues and costs shift in banking and insurance, an industry with $5.7 trillion of revenues today. New customer platforms could capture $50-150 billion 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 billion 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 $150-250 billion 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 as much as $340 billion. The cost of “replatforming” the world’s largest banks is substantial, potentially more than $4 billion each, larger than the average annual dividend paid by the 100 largest universal banks of $1.7 billion.
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.”