They will cease to exist, become commoditised or achieve zombie status
By 2030, only 20 per cent of heritage financial firms will flourish and win.
“The rest will cease to exist, become commoditised or achieve zombie status,” reports David Furlonger, vice president and distinguished analyst at Gartner.
These firms will struggle for relevance as global digital platforms, fintech companies and other non-traditional players gain greater market share, using technology to change the economics and business models of the industry, says Furlonger, who spoke on the risks faced by financial services who do not adapt to the digital era, at the Gartner Symposium/ITxpo 2018 at the Gold Coast.
Banks face a growing risk of failure if they continue to maintain 20th century business and operating models, he adds.
“Digital transformation is largely a myth as institutional mindsets, processes and structures stand firm,” says Furlonger. “Established financial services providers will have to move faster on digital business by building digital platforms or finding niche products and services to sell on others’ platforms.”
Established financial services providers will have to move faster on digital business by building digital platforms or finding niche products and services to sell on others’ platforms
Furlonger says financial services CIOs should recommend a digital platform strategy to the CEO and business leaders based on their organisational style and ambitions.
The largest firms should consider building a digital platform and a supporting ecosystem to drive scale and enable smaller firms to participate. Midsize and regional firms, meanwhile, should either buy or merge with similar firm to gain scale for a platform play, or divest low-return businesses to focus on high-margin niches on other providers' platforms.
Small firms should sell off commoditised products and services and become nimble fintechs, he adds.
According to Gartner’s 2018 CEO survey, while financial services CEOs continue to prioritise revenue growth, there has been a clear shift toward emphasising efficiency and productivity improvements and the importance of management as growth levers.
Gartner says this shift indicates that digital business is predominantly a channel and transaction automation play, focused on business optimisation as opposed to a transformation.
Pete Redshaw, practice vice president at Gartner, says this attitude is dangerous.
“It underestimates the degree of change that digital technology will bring to the industry,” he says. “The future of the financial services industry is increasingly weightless, requiring few physical assets to establish or maintain a presence. That makes the industry especially vulnerable to disruption by digital competitors.”
In addition, emerging technologies (such as blockchain) offer transformational opportunities by creating trust between parties that do not know each other, without intermediary relationships that incumbent financial firms cultivate. Equally, peer-to-peer consensus algorithms can directly match borrowers to those with money, without requiring a bank to mediate.
“The biggest mistake financial services CIOs make is putting too much focus on technology,” says Redshaw. “They should push their organisations for a more coherent response to digital business — it’s important to set the digital vision and destination first, then think about how to lead an organisation there.”
According to Gartner, of the 20 per cent of traditional firms that will remain as winners, three types will flourish:
· Power-law firms: Companies that own a digital platform will use its scale, low-cost infrastructure and the customer information it generates to create new services and enter new markets. Very few (5 per cent) of these winning heritage institutions have the ability to become power-law firms.
· Fintechs: Individual companies or pure-play/neobank subsidiaries will disaggregate traditional financial services in discrete product areas. They will participate in digital platforms, but will not own them. Less than 15 per cent of the winning group of traditional firms can convert themselves into or successfully spin off fintechs.
· Long-tail firms: The dramatically lower costs enabled by digital platforms will allow some traditional providers to act as service brokers. This is likely for large populations of poor and working-class people around the world that were not profitable customers previously. Simultaneously, they can act as concierge providers of bundled offerings to high-net-worth individuals. Around 80 per cent of winning traditional financial services providers can become long-tail firms.
Lessons for CIOs:
Look before you leap. Find out from other C-lines and heads of line of business what the future scenario is for their subsector, region or LoB. Then prioritise the technologies to support that scenario.
Know (and agree with the business) which are the top three development initiatives that will be most effective in helping your organisation’s digital transformation.
Define the key metrics (both business and technical) that will measure success for your transformation strategy.
Source: ‘Digital Leadership and Emerging Technologies for Financial Services’ by Peter Redshaw of Gartner
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