Revolutionary change is transforming the financial services landscape

December 2016

“Revolutions only get called with hindsight. At the time, they are generally experienced as incremental steps that later are viewed as an extraordinary period of change. We are in a period of accelerated evolution that will be called a revolution in financial services.”  

—Summit participant

Financial services companies have been operating for hundreds of years, many of them weathering period after period of disruptive change: global wars, financial and economic crises, information technologies ranging from the telegraph to modern social media.

Now, however, fundamental shifts in the technological, macroeconomic, geopolitical, and competitive landscape suggest that the waves of change buffeting the financial sector may collectively represent more than just another cycle: they could be changing its ongoing structure.

Former US Vice President Al Gore once said, “We are vulnerable to confusing the unprecedented with the improbable … if something has never happened before, we are generally safe in assuming it is not going to happen in the future, but the exceptions can kill you.” The change under way in financial services may be unprecedented, but, as a summit participant asserted, “It is unchallengeable; it is real. The speed of change and the impact on business models is picking up, not slowing down.”  Technology is lowering barriers to entry that have protected large financial institutions from new competition. It is raising serious questions about the value of their legacy assets and transforming how they do business.  

On October 5-6, 2016, more than 75 directors and executives from among the largest global financial institutions, senior regulators, financial technology (fintech) entrepreneurs, and other subject matter experts met in London for the Financial Services Leadership Summit. The summit marked the culmination of a series of discussions with participants in the Bank and Insurance Governance Leadership Networks on the forces impacting the financial services landscape and the implications for financial institutions and their regulators.  

Though some participants questioned the pace and scale of predicted changes coming to the sector, it is increasingly clear that all financial institutions must adapt to a changing landscape or risk obsolescence. A summit participant predicted “a scale of transformation few of us have ever seen,” adding, “You cannot move incrementally from where you are now, but need to try to imagine what the future will look like and then determine what you can do to position yourself, and how quickly.”  Large incumbents, another participant noted, face a particular challenge: “It is easier to start something new than transform a business.”

This ViewPoints synthesizes key themes emerging from the summit and related discussions with financial services leaders over the second half of 2016.  These themes are expanded upon in the following sections: 

  • Technology-fueled transformation is changing the competitive landscape (pages 4-16). Many large financial institutions are in the early stages of transforming themselves into more agile, digital-age companies. Under increased competitive pressure from fintech and other technology companies, and facing a future of slower economic growth and depressed returns, they are identifying ways to leverage technology to improve customer service, increase efficiency, simplify structures and operations, and make better use of their data. They are also increasingly identifying where they can partner with technology companies. Transformation will require some difficult trade-offs and new ways of thinking about talent and culture if large firms are to successfully address legacy structures, processes, and systems to build a platform for the future.

  • Unprecedented economic and political risks are challenging global strategies (pages 17-26). One participant noted, “What is different about change today is that we feel negative and threatened because of the macroeconomic environment. We used to see all this change and call it opportunity.”  Financial institutions are operating in an unprecedented monetary- and fiscal-policy environment, and that environment may be with us for some time, as the underlying causes of slow growth are largely structural, not cyclical.  At the same time, the political will and leadership to address these issues seems largely absent, with constructive engagement between financial institutions and governments threatened by populist politics. Faced with such large-scale sources of uncertainty, financial institutions will need to take a long-term view of sustainability to survive a wide range of economic and policy scenarios. 

  • Regulatory and supervisory approaches will continue to evolve (pages 27-34). Sam Woods, the new head of the UK’s Prudential Regulation Authority, said in a recent speech, “The ways in which firms organise themselves, and the tools by which we apply our supervisory judgements, are shaped by global regulatory standards. And in those standards, there has been a revolution.”  The reforms, now nearly complete, have had a major impact on financial institutions. Yet, as the landscape continues to change, regulation must continue to adapt to a new world. Though there remain important outstanding questions regarding the final implementation of the global prudential reform agenda, the conduct agenda is likely to see the greatest change. Many regulators are renewing their focus on culture, governance, and consumer protection issues, and considering ways to expand the regulatory perimeter to bring new entrants into the fold and allow for innovation in established firms. But regulation will always lag behind market developments. The revolutionary change in the financial services landscape is likely to be met with a more gradual process of regulatory evolution.