It feels like disruption is taking place in most parts of our lives today: from ordering a taxi using Uber, snubbing a hotel in favour of an Airbnb, to transferring cash to a friend at the click of a button with Monzo. There are plenty of disruptive businesses that continue to make aspects of our everyday lives easier.
However, when it comes to the world of financial advice and investment management, it’s fair to say that disruption has been much slower than anticipated.
Why is this? A recent paper entitled ‘Harnessing the power of disruption’, published by PWC, presents some interesting points on the topic. While personal finance is often cited as an area that is ripe for disruption, PWC noted that customer demand for new propositions has so far been limited. Low and declining margins in the sector also suggest that supply currently outstrips demand. Meanwhile, new entrants face the hurdles of regulatory scrutiny and the pressures of sustaining a full economic cycle.
However, that is not to say that change won’t happen later down the line. PWC’s paper delivers a stark message:
More disruption is coming to financial services – ignore it at your peril!
So how can you prepare for further disruption and will there be opportunities to capitalise on change?
Firstly, PWC has presented the scope of the opportunity. It estimates that disruption in financial services could account for approximately £100 billion in revenue across the UK by 2030.
In order for businesses to fully take advantage, the paper suggests that they must think about disruption in a different way. While technology is a driving force, it isn’t the sole factor. In fact, PWC believes the next wave of disruption in financial services won’t simply be driven technological innovation, it will be down to a number of ‘enablers’ colliding. These include:
» Customer appetite
In turn, these must be supported by macro trends, such as socio-demographic shifts, which influence consumer demand for new products.
The trends currently influencing millennials serve as a prime example. This group can expect to live longer, and will therefore be in retirement for longer. They are finding it harder to get on the property ladder in comparison to previous generations due to higher house prices. Faced with high living costs, they are also struggling to build savings.
“In this context it’s not simply pension calculations that need to change. The overall approach to wealth and money management will have to look very different. What if banks of the future focused on finding smarter ways to help consumers save?” PWC
Alternatively, new products could come from start-ups using artificial intelligence to nudge consumers to build their savings up or from businesses outside of financial services. Whatever form they take, millennials appear to be open to any products and services that are digital, provide up-to-date information at their fingertips and are easy to use.
Areas ripe for disruption
If you want to step back and take a broader view of the financial services industry, PWC has assessed the parts of the industry that are most likely to be disrupted over the next decade, as well as the potential revenue that could be generated. Check out the table below…
The forecasts are fascinating. While the transactions sector may not come as a surprise to some, it’s interesting to see the potential scope for disruption in the life and pensions market.
Here, PWC anticipates that changes in distribution and the aftermath of the Pension Freedoms (introduced in 2015) could cause 30% of revenues generated by companies in the life and pensions sector to be disrupted by 2030. This equates to £15.9 billion.
Change will be supported by increased life expectancy and regulation. PWC concludes that there will be significant opportunities to cater for individuals with little to no long-term provision. Meanwhile, the life insurance space is poised for further disruption as a result of new distribution models, as well as technological developments like machine learning and artificial intelligence.
Profiting from change
So how can your business benefit from disruption? I would agree with PWC’s conclusion that the financial services businesses that prosper will be those that are agile, have responsive business models and a creative mindset. Large firms with these characteristics could be particularly well-positioned because they have (hopefully!) already gained the trust of their customers, and will be able to draw on a pool of resources to enact change within the business.
That isn’t to say there aren’t opportunities out there for smaller businesses or start-ups, but it’s important to recognise that they must overcome the challenges of building scale and attracting the necessary funding.
Understanding the market, spotting the changes that are taking place early on and having a gauge on whether there is strong customer appetite for change will prove vital.
Finally, for anyone who is thinking about how to respond to disruption, I think PWC’s five questions are very useful:
» What will your value proposition be? How are your capabilities different?
» Are you able to build a customer-centric proposition and operations?
» Can you use partnerships and deals to stay ahead of the market?
» How can you ensure that risks are understood and managed within your business? Are you able to achieve regulatory compliance in a changing environment?
» Can you embed data analytics and deliver a modern technology platform?
Further disruption is coming, so keep an open mind about the potential opportunities that could be created.