Within 12 years time, 80% of financial firms will either go out of business or be rendered irrelevant by new competition, changing customer behaviour and advancements in technology, according to forecasts by Gartner.
Gartner bills the rump as 'heritage financial firms', existing only formally but not competing effectively, as global digital platforms, fintech companies and other nontraditional players gain greater market share, using technology to change the economics and business models of the industry.
David Furlonger, vice president and distinguished analyst at Gartner says banks face an alarming risk of failure if they continue to maintain 20th century business and operating models.
“Digital transformation is largely a myth as institutional mindsets, processes and structures stand firm,” he says. “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 points to Gartner’s 2018 CEO survey, noting that 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. This shift indicates that digital business is predominantly a channel and transaction automation play, he suggest, focused on business optimisation as opposed to a transformation.
According to Gartner, of the 20% 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 percent) 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% 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% of winning traditional financial services providers can become long-tail firms.
Pete Redshaw, practice vice president at Gartner, 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.”
The speed of digital transformation in financial services partly depends on regulation, he says, as well as customer demographics and behaviors, which will vary from country to country. In some nations, conservative regulations will inhibit innovation, while other countries, such as Australia, Brazil, China, India and the UK, will use regulation to speed transformation.