Reinventing financial services

December 2018

“Things are changing faster than we can keep up.”
—Summit participant

Talk of disruption in financial services has been common for many years. Bill Gates famously proclaimed in 1994 that “banks are dinosaurs … we can bypass them.”  In the years since the global financial crisis, speculation about the disruption of financial institutions has led to hyperbolic claims, such as those emerging recently from a Gartner analyst who claimed that within twelve years, 80% of financial services firms would either go out of business or be rendered irrelevant; this seismic shift would be driven by new competition, changing customer behavior, and advancements in technology.  While such predictions may be exaggerated, they reflect a reality that almost every financial institution leader now acknowledges: they and their institutions face tough challenges and difficult choices about their business and operating models. Many leaders insist that their survival will need not just a natural evolution in financial services, but a more drastic transformation. A summit participant asserted, “There is a difference between innovation and transformation. Banks, for example, have been very innovative in the last 50 years if you think about internet banking, mobile, credit cards, ATMs, etc. But innovations are improvements in the way things happen—they are linear and expensive. We are approaching the point of nonlinear disruption.” 

On October 2-3, 2018, directors and executives from among the largest banks and insurers globally, fintech executives, regulators, and other subject matter experts met in London for the Financial Services Leadership Summit to discuss the timing and nature of this nonlinear disruption. Leaders from large financial institutions are working hard to keep up with the changes underway, but the pace is accelerating such that it is difficult for executives, never mind non-executive directors, to keep abreast of advancing technology and a changing competitive landscape and then determine the appropriate course of action in response. They also acknowledge the challenges inherent in transforming massive organizations with long histories of operating in traditional businesses and traditional ways.  

Most leaders tell us that they have no intention of completely upending the status quo, despite the dire predictions from some commentators. As they look into the future, summit participants do see a changing financial services ecosystem; one in which incumbent firms need to adapt operating models, structures, and systems to improve agility and efficiency, and one where they may play different roles than they have historically. Some institutions will become utilities in some businesses, the pipes, the product manufacturer, or the balance sheet for those who sell directly to customers. Some businesses may become commoditized, with pressure on pricing eroding margins. Some firms will choose to compete in new ways for customers, using their core offerings as a platform to expand services and offer access to third parties. New partnerships and different forms of collaboration are already emerging, as some fintechs and tech companies become competitors, but also partners. The changes are coming so rapidly that leaders are both careful not to make imprudent bets but also endeavoring to move quickly enough to ensure they don’t get left behind. They also see traditional risks, like geopolitical risk, increasing and climate change moving up the risk agenda, with limited political will to address it. They must manage these risks and manage their legacy businesses and legacy systems even as they work to transform for the future. 

This ViewPoints synthesizes themes emerging from the discussions over the course of the summit. It is organized in the following sections:

  • Disruption in financial services: the pace is rapidly accelerating (pages 4–16). The accelerating pace of technological advancement and the applications in financial services, are creating opportunities to serve customers in new ways and giving rise to new entrants who are achieving real scale and experimenting with innovative models. Incumbents see potential to apply their own innovative approaches, but the rapid changes make it difficult to predict how different businesses will be impacted and what investments and strategies will be most effective. 

  • Incumbents struggle to respond to the pace of change in financial services (pages 17–29). Large financial institutions were not designed to respond with agility to this pace of change. But they are experimenting with new systems, new structures, and new approaches. They are also expanding acquisitions and partnerships with third parties, focusing on core competencies, and considering new business models. 

  • Financial inclusion: a commercial opportunity (pages 30–38). One largely untapped opportunity for financial institutions is expanding services to underserved markets and customers. Technology is enabling new approaches to identity, credit scoring, and service provision. That in turn is opening up opportunities to profitably provide services to customers historically underserved by the financial system, including small businesses.