Summit participants noted that the maturity and sophistication of digital capabilities will increasingly differentiate financial institutions from competitors, replacing the traditional drivers of profitability, scale, history, and brand recognition.
Customer expectations drive technology investments
The pandemic has accelerated adoption of digital interactions. The surge in demand caused by the pandemic has underscored incumbents’ long-standing need to improve their capabilities or risk losing customers to competitors, including new entrants and technology companies. Customers no longer tolerate inferior products or poor digital experiences.
Personalization is imperative. A FinTech CEO said, “As I think about what the world may look like for financial services 10 years from now, all of this is gravitating towards hyper-personalization.” To meet that expectation, financial institutions must improve how they manage data.
Firms that were further along the technology transformation journey fared better in the pandemic. According to Forbes, “Almost overnight, the COVID-19 crisis widened a performance gap – between those organizations that invested in technology innovation at scale before the pandemic and those that did not – into a chasm.”1
The unbundling of financial services
Incumbent banks and insurers have traditionally looked for technologies to increase efficiency and lower costs. FinTechs, by contrast, start with a customer problem, identifying ways to address it with digital tools and building new business models around digital solutions.
Participants see how banks might have to choose between being product manufacturers or distributors. One participant observed, “There’s consolidation on the manufacturing side – fewer banks want to be manufacturing products, but we see a huge expansion on the distribution side.”
Financial institutions are also weighing the potential to partner with leading companies in other sectors, although this comes with the price of losing the primary interface with customers. Attendees expect unbundling to be a top consumer trend, as young people use a host of applications to manage their financial services needs.
The threat from tech companies may be approaching a tipping point
FinTechs, InsurTechs, and big tech companies continue to expand their financial services offerings and gain market share as emerging models may represent more growth opportunities.
New threats from big tech and challengers
The unbundling of financial services and embedded finance offer opportunities for big tech firms. However, questions remain about their appetite to enter the market, given heavy regulation. Of course, technology companies do not have to offer financial services of their own; they already embed offerings from insurers, banks, and challengers via apps and platforms, offering convenience for customers.
Customers are warming to big tech in financial services, as confirmed by research:
- Policyholders’ willingness to purchase insurance from big techs has increased from 17% in 2016 to 36% in January 2020 to 44% in April 2020.2
- 24% of US consumers are very or extremely likely to make Amazon, Apple, or Google their primary financial services provider if doing so made money management easier.3
- Google’s recently relaunched Google Pay platform includes an Insights offering that allows users to connect to their bank accounts for a searchable overview of their finances.
- In 2021, Google will partner directly with several banks and credit unions to offer online checking and savings accounts.4
FinTechs and InsurTechs continue to challenge incumbent financial institutions. Banks may be more vulnerable than insurers. Although underwriting and distribution are susceptible to disruption, participants view InsurTechs as still being in the early stages of development compared with FinTechs in banking. One participant noted, “There are very few parts of the insurance spectrum that have been lost to challengers, whereas in banking you can already spot places where FinTechs have won.”
But the pandemic has created a shakeout among the challengers. A flurry of FinTech acquisitions in the early months of the pandemic illuminates their potential struggles.5 In September, one report suggested that the FinTech sector faced an “existential threat” from pandemic-induced adverse economic conditions and insufficient available funding.6