Four out of five heritage financial services firms will become obsolete due to digitalisation and this will happen in the next 12 years, according to Gartner. Financial service firms that don't upgrade their business models for the digital era will go out of business, become commoditised or exist only formally without competing effectively, said the research and advisory company in its report Digitalization Will Make Most Heritage Financial Firms Irrelevant. It added that companies such as banks and insurance 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.
Technology must transform, not just automate
Banks face a growing risk of failure if they continue to maintain 20th century business and operating models, according to Gartner analyst David Furlonger, speaking an event in Australia this week. He said: “Digital transformation is largely a myth as institutional mindsets, processes and structures stand firm. 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.”
Banks are underestimating the degree of change that digital technology will bring to their industry, according to Gartner's Pete Redshaw. He said: “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.”
Too many financial services CEOs continue to see emerging technology as a means to optimise business through automation, rather than transform the business, according to Gartner’s 2018 CEO survey. Redshaw adds: “The biggest mistake financial services CIOs make is putting too much focus on technology. They should push their organizations 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 organization there.”
Surviving in digital era
Gartner, sets out three types of company that will flourish in the digital future:
- 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.
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