The 2020 edition of our State Of The Financial Services Industry report explores how pressure is building to deliver on investment programs and how we believe winning firms will manage the collision between vision and value.
Vision and value: the mindset collision
Financial institutions face a big challenge: creating the business of the future from the legacy they have today. This is revealing a major tension between two opposing mindsets:
Exhibit 1: The Mindset tension
Source: Oliver Wyman Analysis
When the value mindset dominates within firms, the result is myriad small changes with known but low-impact outcomes. And when the vision mindset dominates, aggressive amounts of spending can go into transformation efforts that don’t yield results.
Pressure is building
There is considerable investment and change activity underway across the industry. The average transformation program being announced calls for spending of 5 percent of revenue per year.
Exhibit 2: Financial services investment program spend varies widely
Sources: Datastream from Refinitiv, company investor presentations and press releases, Oliver Wyman analysis
Firms have hired Chief Digital Officers and teams, rolled out new ways of working, and have large technology programs in progress. Incubators, accelerators, and innovation teams have also been set up, often consuming significant management attention. Some breakthroughs are occurring. Yet positive impact on the bottom line has been rare, and few firms we speak to are happy with the rate of change.
Until recently, this has been a concern but not a crisis. But pressure is building. Investors, analysts, and management teams are asking more and more questions about the rate of progress.
Investors are unconvinced
Investors are voting with their feet. There has been a dramatic change in the relative values of financial services and technology stocks. Since 2010, the combined market capitalizations of the 20 largest financial services firms has grown $800 billion compared to $3.8 trillion for the 20 largest technology companies.
We conducted a survey of investors to find out what they think about the financial services industry, its response to digital, and current investment programs. This showed that only a quarter of investors are confident digital transformation strategies will be effective, and hardly any believe plans are well articulated.
Investors understandably struggle to make sense of programmes and end up being outright skeptical. As one put it, “It is all jumbled up – IT replacement, automation, customer journeys...”
Exhibit 3: Investors are unconvinced about investment plans
Source: Oliver Wyman and Procensus investor survey, November 2019
Investors do not feel they understand what firms are investing in, or why, and are distrustful of the cost-benefit case of significant technology investments. As a result, they heavily discount investment initiatives. Concerns around implementation costs and the likely transfer of most benefits to customers are also common themes among investors.
Despite skepticism on the likelihood of current programs delivering, 80 percent of investors still say transformation is important to their investment appetite and the majority believe digital will have a positive impact on profitability, mainly through productivity.
Why the window to deliver is gradually closing
It is becoming increasingly critical to deliver on investment. The good news is that the firm of the future is emerging. The ambition is to leverage the inherent advantages of incumbency with the latest technology and ways of working. “Digital” has become better understood and is being gradually absorbed into business as usual. But the reality is that a huge amount of work is still needed to build the financial services firms of the future.
The vision challenge: the outside threat is growing, not receding
A three-way wrestling match is underway between financial services firms, fintechs, and technology companies. Scale and marketing cost challenges have limited the inroads of fintechs into core businesses. Nonetheless, newcomers continue to cherry-pick profitable activity and erode margins.
All the big technology companies are positioning themselves in financial services, with financial services firms caught between seeking partnerships and making defensive moves. Significant spending and shared industry approaches are going to be needed to avoid firms becoming “dumb utilities”.
The value challenge: a threat to investment funding as the cycle turns
Revenue shifts within the industry to new fintech and big technology companies have played its part in subduing incumbent growth, but this impact has been secondary to macro and regulatory forces.
The industry is now facing difficult conditions and any further downturn could have a severe impact on investment budgets. Major recessions of the past 30 years have all coincided with single-year losses that far eclipse the average of 5 percent spent on transformation programs.
Starting point matters
Where financial performance has been squeezed, investors need to know there is an immediate plan to improve financial performance. Where an institution still has legacy technology issues, a complex and costly operating model, and overcapacity, investors expect the priority to be core business improvement. In other markets there is more runway for investment to drive growth.
Consolidation is also likely to be an outcome. There has been little consolidation in most subsegments of financial services for a decade. The tone from regulators has now changed from “too big to fail” to increasingly “too small to survive” and as firms look to the longer term, the ability to deliver value while finding the capacity to invest is likely to become a strong motive for greater scale.
Five ways to manage the mindset tension
The collision between vision and value can be badly handled or avoided altogether, leaving organizations to swing between undisciplined over-investment and focusing on incremental changes – and putting their long-term competitive position at risk. Getting the balance right takes an open-minded approach and the surfacing of difficult choices.
There are five characteristics that will set the winners apart. Each of these requires difficult choices to be taken and trade-offs between vision and value:
Exhibit 4: Where vision and value collide
Source: Oliver Wyman analysis
The path to balance, reinvention, and growth for financial firms
Managing the collision between vision and value does not mean picking sides between the two. Instead, it means bringing the mindsets together to agree on the change portfolio, growth plays, productivity objectives, and metrics used. It means communicating a clear narrative and consistent, authentic messages internally and externally.
Exhibit 5: A surgical approach to the change portfolio
Source: Oliver Wyman analysis
The winners will be the firms that most successfully unite the vision and value mindsets, agree on what is critical to thrive long-term, and invest with discipline. Embracing this creative tension will lead to balance, reinvention, and growth.