In total, $1 trillion of revenues and costs are up for grabs in an industry with revenues of $5.7 trillion. Some of that will simply be passed along as savings to customers through lower prices. Much of the rest could go to fintech startups unless established firms aggressively develop new products and customer interfaces. That means first understanding what modular financial services will look like.
The most visible changes will come where customers seek out a service. In the United Kingdom, aggregators appeared in property and casualty insurance in the early 2000s, letting customers compare prices easily. Aggregators’ penetration in auto insurance has risen to 65 percent, from just 5 percent a decade ago, and a quarter of all policyholders now switch providers every year, driving down prices. Throughout the financial services industry, price compression could benefit customers from between $150 billion and $300 billion.
A race is now on to build digital platforms that go beyond simple price comparison, and reduce hassle, increase choice, or boost speed. These could focus on major life events, such as buying a house. Through an online platform, a potential buyer could instantly access their asset portfolio; then check out their eligibility for a loan – and search for the best deal. Electronic contracts could make the whole process extremely quick. New customer platforms could capture between $50 billion to $150 billion of revenues from today’s banking and insurance markets.
Platforms will provide access to a wider range of products, which will therefore need to be designed for very specific customers and needs. Data and analytics will be big enablers: In auto insurance, telematics systems are already tracking driver behavior, promising lower prices for safer drivers (and possibly reducing road fatalities). Robo-advisory – the use of algorithms to find the right investment product for a customer – has triggered an analytics arms race. Innovative products could capture between $150 billion and $250 billion of existing revenues.
The biggest bottom-line impact could come from retooling financial institutions’ back offices, which are often too big, too old, and too clunky. Many firms will outsource large chunks of these operations, such as loan-payment processing or P&C insurance claims management.
Bigger groups might be better off completely overhauling their internal systems and creating a “data fortress.” This could cost a bank $4 billion or more and comes with the risk of the new model being obsolete by the time it is ready. However, legacy systems will not be sustainable in the new, modular world, which will need speedy launches for new products and a slick customer experience.
Financial services have so far been spared a large-scale startup invasion. The industry has proven a high hurdle for newcomers because of its capital intensity, high level of regulation, and greater need for trust and privacy.
But startups may now be able to skim off some of the more lucrative lines – depending on how quickly traditional banks respond. Specialist customer platforms attract a price-to-earnings ratio of 35 and back-office providers trade at ratios of 25, compared to ratios ranging from 14 to 17 for a representative sample of integrated financial institutions.
To survive in a modular world, firms need to ask themselves: What are my areas of strength? And what can others do better?