Modular Financial Services

Financial services companies have gone through major changes over the last 10 years. Nonetheless, while the turmoil in financial services has been dramatic, other industries have been more radically transformed. For example, digital technology has destroyed established business models in music and publishing. Such a transformation may now be on the horizon for financial services.

We have identified $1 trillion of revenues and costs that might be up for grabs.

Chris Allchin and Matt Austen, Partners

We believe financial services are becoming “modular”, with digital distribution platforms, new product providers, alternative sources of capital and a growth in outsourcing fundamentally reshaping the industry.

Established firms will need to respond to the modular industry structure. Some will try to compete with commerce and technology firms and build sophisticated customer platforms. Others will concentrate on areas of sustainable advantage, making the most of their customer data, analytics and funding models. And they will reinvent their back offices as supply chains.

Banks and insurers have adapted to new technology in the past and we think they will do so again. Nonetheless, financial services will be more modular in ten years’ time and today’s banks and insurers may look very different.

For consumers, modular financial services means more choice, transparency and seamless switching between multiple providers.

1What do you mean by “modular” financial services?

A new structure for the industry: moving from large one-stop shops to a variety of firms competing at different points in the value chain. Customers buy financial services through distribution platforms separate from product providers. They have many more firms supplying services. And providers themselves will buy-in services from a range of specialists rather than operating all their activities in-house.
2How big are the changes you are describing?

This is a change to the whole structure of a $5.7 trillion industry. There will be sizeable shifts across the value chain and we have identified $1 trillion of revenues and costs that might be up for grabs. As an industry moves towards “modular demand” the distribution platforms take a cut, prices become more transparent and new providers can emerge. The shift to “modular supply” brings large parts of the existing cost base into play and creates big opportunities for outsourcing firms.
3How long will all this take?

This is happening now. Amazon recently launched a loan offering for its UK customers in partnership with Hitachi Capital. A race is underway to build digital services for SMEs linked to financial products. Major banks have announced dividend cuts to replatform their back office. That said, disruption takes time to unfold in financial services. New entrants need capital and funding to scale-up product provision so “Uber moments” are rare. The power of customer platforms will grow over the next 3-5 years as apps are developed that save customers money and hassle. The full financial impact, including the major changes needed to supply chains, will take at least 10 years.
4What does all this mean for banks and insurers? What will they look like?

The value that a firm provides will become transparent. Any weaknesses in the product offering, services provided or cost inefficiency is brutally exposed. Banks and insurers will need to work out where they can compete across the customer platform, product provision and the back office. They will need to invest, sell and partner accordingly. A wide range of strategies will be possible. For many, this will be a big growth opportunity, allowing them to access new customers, in-source from other firms and create new client offerings.
5Which parts of the industry will be most affected?

There are a lot of factors which drive a more modular or integrated industry structure and these forces will play out in each individual market. Independent customer platforms are more powerful when purchasing happens frequently and price is the key differentiator: payments and Property and casualty insurance are good examples. SME banking is especially at risk from intermediation by digital platforms linked to commerce. Alternative capital providers such as loan and hedge funds have an advantage with riskier assets where regulation disadvantages regulated institutions: sub-prime loans and catastrophe risk insurance for example.