Finance 'falling behind' more disruptive industries

Compared with industries such as hospitality, airlines, transport and home entertainment, the financial services industry is yet to see a new entrant capture significant market share, according to PwC.

According to a new report by the professional services firm, while there have been new entrants to financial services sectors, incumbents have generally been able to withstand these challenges and avoid any loss of their customer base.

In comparison to other industries, most consumers still take a relatively low interest in financial services products and rarely scan the market for new offerings.

PwC analysis of the consumer/financial services provider relationship reveals some key factors: 48 per cent of British consumers would not consider purchasing any financial product from a FinTech, and only 19 per cent would consider switching their main current account provider in the next two years.

Across the asset and wealth management subsectors the degree of expected technological advance - or disruption - varies widely. PwC suggested that the key areas where technological step changes could materialise are: wealth transfer to millennials, purpose-driven investing, and growing customer appetite for digital offerings.

Younger inheritors place a higher emphasis on broader purpose and impact than the older generation, with the report stating that 93 per cent of Millennials believe social or environmental impact is key to their investment decisions.

According to PwC analysis, 66 per cent of 18 to 24 year olds would pay more for environmental, social and corporate governance (ESG) investment, alongside 62 per cent of 25 to 34 year olds, versus only 30 per cent of 55 to 64 year olds and 26 per cent of the over 65 community.

Also, 44 per cent of those sampled would be willing to pay a premium of between 20 and 100 per cent extra for an ESG investment.

Institutional customers are also pushing market participants to focus more on purpose-driven investing across asset classes, including sustainable smart buildings in real estate. ESG mutual fund assets are predicted to grow 8.5 per cent year-on-year between 2017 and 2025, reaching $2.08 trillion – which is a stronger growth rate than the overall industry.

Technological advancements and customer demand for superior returns continue to increase pressure on institutional investments market players, but have not led to major disruption, according to PwC.

Regulatory interventions aimed at providing fairer outcomes for customers, such as the Retail Distribution Review and MiFID II, made it challenging to serve customers profitably. As a result, many incumbents refocused their business models onto higher margin segments, leading to an advice gap and underserved customers in need of affordable investment solutions.

Compound annual growth rates in fund management fees are now set to decline by 19 per cent and 20 per cent in active and passive markets respectively.

Incumbents are most likely to reap the benefits of disruption due to three key challenges for new entrants: the importance of a trusted brand, high levels of customer inertia and high acquisition costs.

However, incumbents are unlikely to enjoy the benefits of disruption if they do not work with newer market players, the report noted.

Sheetal Vyas, lead director of PwC’s disruption practice, said: “Digital-only financial service products are catching on across the spectrum, if this continues incumbent banks, asset managers and insurers face losing customers to leaner customer and experience-centred challengers.

“In order to deliver a future-proof solution in such a competitive marketplace, disruption should not just be an 'add-on' to a strategy, but at the centre of a business to ensure relevance and sustainability.”

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