Incumbents in Australia’s largest sector – financial services – risk dramatically reduce profitability and market share as rapid technological change disrupts the business environment according to a new research from Deloitte and the World Economic Forum.
Called – the Future of Financial Services report – the study highlights which emerging innovations are the most impactful and relevant to the financial services industry.
Among the key insights of the research
- The key insight is that disruption is not a one-off but a continuous pressure so innovation will shape customer behaviours, business models, and the long-term structure of the industry.
- Innovation in financial services is deliberate and predictable. Incumbents are most likely to be attacked where the greatest sources of customer friction meet the largest profit pools.
- Innovations have the greatest impact where the business models are platform based, modular, data intensive, and capital light.
- The imminent effects of disruption will be felt in the banking sector; however, the greatest impact is likely to be in the insurance sector.
- Incumbent institutions will employ parallel strategies. They will aggressively compete with new entrants as well as use their legacy assets to offer entrants the necessary infrastructure and access to services.
- Collaboration between regulators, incumbents and entrants will be needed to understand how innovations alter the risk profile of the industry.
The authors identifiy eleven critical clusters of innovation that are changing financial services across the six key functions of the sector: payments, investment/wealth management, insurance, deposits and lending, capital raising, and market provisioning.
According to Rick Porter Deloitte Financial Services leader Australia, “It is a critical moment for Australia and the financial services sector as the country reaches a point of inflection, transitioning from a product to a services economy. Financial Services is the economy’s largest sector, worth nine per cent of gross value, and contributing more than $130 billion to the gross domestic product each year.”
“It is the facilitator and protector of capital and provides the liquidity required for driving growth in all other sectors of the economy,” he said.
Porter argues that is is critical for the community to create the right environment for the financial services sector to operate within Australia.
“As rapid technological change reshapes traditional definitions of value, tears down barriers to entry and undermines the business models of incumbent institutions, forces such as accelerating technology, shifting customer preferences, and a changing regulatory landscape have the potential to dramatically reduce profitability and market share for incumbents.
“But they also represent an opportunity for institutions that are able to harness new innovations. And the Australian financial services sector – one sector that feels the heat of disruption the most – has the capability to take advantage of it.”
Lead author of the original 176-page report, the World Economic Forum, Jesse McWaters said: “What was missing before this research was how the transformative innovations all connect. So with Deloitte we have developed a framework for understanding the evolutionary path of emerging innovations, and an understanding of which innovations are and will be the most relevant.”
Porter said, “Customer preferences and behaviours demand innovations, and create additional risks and considerations. This means that collaboration is the key. The industry response needs to be well thought through, with agile policies and regulatory responses necessary to protect and grow Australia’s prosperity.”
He added: “Australian financial institutions are gearing to partner and grow their own fintech capability. And when it comes to cybercrime and regulation, increasing digitisation is attracting greater criminal activity, as well as corresponding scrutiny from regulators and government agencies.”
The original World Economic Forum research included 100 interviews with industry experts, as well as workshops where executives from global financial institutions like UBS, HSBC, Deutsche Bank, Barclays, Visa and MasterCard met with leading global fintech innovators like Zopa, Funding Circle, Transferwise and Ripple to discuss the future of their industry.