The Financial Services sector is still playing catchup with more disruptive industries, claims a new report from PwC. This is not because of a lack of innovation, but because it is a hard market for startups and new entrants to crack, while incumbents are slow to transform traditional operations.
Compared with areas such as hospitality, airlines, transport, and home entertainment, Financial Services has yet to see a new entrant capture significant market share, says PwC – in a consumer space in which brands like Netflix, Uber, and Airbnb have gained mindshare and changed customer behaviour.
The report says, “While there have been new entrants to FS sectors, incumbents have generally been able to withstand these challenges and avoid any loss of their customer base. In comparison to other industries, most consumers still take a relatively low interest in Financial Services products and rarely scan the market for new offerings.”
There may be several reasons for what PwC sees as a slow transformation of behaviour. One was outlined at a conference last year on Competition in the Digital Economy.
Open Banking has been a “slow burn”, but momentum is building and the lack of overnight transformation of the industry was only to be expected. That was the view of Richard Rous, Competition and Regulatory Strategy specialist at Lloyds Banking Group.
Speaking in September 2019 at a Westminster eForum event, he said that industry engagement with consumers is still building, less than two years after data portability was introduced.
Rous – who led the implementation of the Competition and Markets Authority’s Remedies in Personal and Business Current Accounts, said he believed that the industry’s focus on customers sharing data is a red herring. However, consumers will be attracted by companies that offer to help them manage their finances better, he suggested.
PwC’s analysis of the customer-provider relationship reveals some notable findings. For example, 48 percent of UK consumers would not consider purchasing a financial product from a FinTech company, while only 19 percent would consider switching their main current account provider in the next two years.
These figures contrast with a November 2019 survey by electronics and enterprise systems giant, Fujitsu. It found that than one in ten consumers (11 percent) now exclusively use ‘challenger’ banks instead of established high-street names. And in five years’ time, less than half of consumers will solely bank with traditional brands.
That research was carried out in August 2019 among over 8,500 consumers in the UK, Germany, Spain, the Nordics, and Ireland.
While over two-thirds of all respondents and more than three-quarters of UK consumers only use traditional banks at present – despite the strength of the local FinTech sector – the industry is reaching a tipping point, said Fujitsu.
In five years’ time, less than half of consumers (48 percent) will only bank with a high street name, 17 percent will solely use challenger services, and 35 percent will bank with a combination of new and traditional outlets.
New consumers choose digital services when they enter the market, added the Fujitsu report, a trend that should be worrying incumbent banks. Speed is part of the attraction for all age groups, with 42 percent of respondents saying that they appreciate faster and better access to their financial information.
According to PwC, there are certainly opportunities to capture the imagination of a younger, more environmentally conscious, tech-savvy base. These include wealth transfer to millennials, purpose-driven investing, and a more general desire for low-friction digital offerings.
“There is less appetite for new propositions in the high-net worth segment, but wealth transfer could lead to increased demand for impact investing and digitally enabled prototypes,” says PwC.
The mass and mass-affluent savings and investments sector have been undergoing disruption, driven by unmet customer demand and a mature set of enablers, continues PwC. Regulatory interventions aimed at providing fairer outcomes for customers, such as RDR and MiFID II, have made it challenging to serve customers profitably in these spaces.
As a result, many incumbents have refocused their business models on higher margin segments, leading to an ‘advice gap’. This has led to a rise of underserved customers in need of affordable investment solutions.
Overall, incumbent providers are most likely to reap the benefits of digital disruption, says PwC. This is due to three main challenges for new entrants: the importance of a trusted brand; high levels of customer inertia; and steep customer acquisition costs.
However, incumbents are “unlikely to enjoy the benefits of disruption if they do not work with newer market players”, adds the report.
Sheetal Vyas, lead Director of PwC’s Disruption practice, explained, “Digital-only Financial Service products are catching on across the spectrum. If this continues, incumbent banks, asset managers and insurers face losing customers to leaner customer and experience centred challengers.
“In order to deliver a future-proof solution in such a competitive marketplace, disruption should not just be an ‘add-on’ to a strategy, but at the centre of a business to ensure relevance and sustainability.”
Other potential players in the financial services market, for example Big Tech, are often deterred by significant barriers to entry, says PwC. For example, regulatory requirements make the market expensive and complex to enter and serve. At the same time, the potential returns often do not justify the investment required to overcome these barriers and compete as a full-service player.
The report says, “These firms are likely to only enter sectors where there is both a genuine commercial incentive and where they enjoy competitive advantages.
“Nonetheless, they need to be aware of the potential risks they may face. Big Tech must also be wary of intensifying regulatory scrutiny. The global Financial Stability Board recently expressed concerns that Big Tech companies entering the banking sector could pose risks to financial stability. In line with this concern, the UK plans to introduce a technology regulator.”
- Transform Finance previously reported on how South-east Asian ride-sharing company Grab is extending its move into FinTech and payments by applying for one of five digital banking licences that are being issued in Singapore. Grab is not the only ride-sharing business planning a move into digital finance, beyond providing a financial back end to its drivers. Last October, Uber – which partners with Grab in Asia – launched Uber Money as a mobile banking platform for its drivers and couriers, a service that is likely to be extended to users in the near future.