Three quarters of FS firms ‘irrelevant by 2030'

More than three-quarters of financial firms will become irrelevant or go out of business altogether by 2030, according to a new survey from Gartner.

The research firm suggested 80 per cent of ‘heritage’ financial firms face a bleak future and will struggle for relevance as digital platforms, FinTechs and other non-traditional players expand their market share and use technology to disrupt business models.

According to Gartner’s 2018 survey of chief executives, while financial services companies continue to prioritise revenue growth, there has been a clear shift of emphasis towards efficiency and productivity to achieve growth, which suggests that digital business is predominantly focussed on business optimisation instead of transformation.

Speaking at the Gartner Symposium/ITxpo event on the Australian Gold Coast today, David Furlonger, vice president at Gartner, said banks face a growing 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 stated. “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.”

Gartner’s analysis also suggested that emerging technologies such as blockchain offer “transformational” opportunities by creating trust between parties that do not know each other, thereby rendering the intermediary relationships offered by financial firms, banks and brokers, obsolete.

It also suggested that algorithms offering peer-to-peer lending are able to directly match borrowers to those with available funds, without the need for a bank to mediate.

Pete Redshaw, practice vice president at Gartner, warned against attitudes that underestimate the degree of change that digital technology will bring to the financial services industry.

“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,” he said.

However, he advised that firms should be wary of investing too much in new technology at the expense of a long-term digital strategy to keep up with the pace of change.

“The biggest mistake financial services CIOs make is putting too much focus on technology,” said Redshaw.

Gartner said that of the 20 per cent of traditional firms that will survive into the digital future with their balance sheets in tact, three key types will flourish.

The first is the ‘power-law firm’ that harnesses digital platforms to provide low-cost infrastructure which channels customer information to create new legal services and enter new markets.

Despite the apparent easing of processes through technological innovation, Gartner predicted that just five per cent of the leading heritage institutions will be able to become power-law firms.

The second category is FinTech firms offering a disaggregation of traditional financial services into discrete, digital product areas. These companies will participate in digital platforms but will not own them, with Gartner predicting that less than 15 per cent of the winning group of traditional firms can convert into or successfully spin off FinTechs.

The final category of company likely to be thriving by 2030 is the ‘long tail’ firm – able to dramatically lower their costs by using digital platforms while allowing some traditional providers to act as service brokers.

This in turn may help to improve financial equality, as financial services firms find it more profitable to reach large populations of poor and working class people. The same technology will also facilitate long tail firms to acts as ‘concierge providers’ to high-net-worth individuals.

On a more reassuring note, Gartner suggested that around 80 per cent of winning traditional financial services providers have the capacity to become long-tail firms.

In concluding remarks, the study noted that the speed of digital transformation to 2030 and beyond partly depends on regulation, as well as customer demographics and behaviours, which will vary from country to country.

In some countries conservative regulations will inhibit innovation, while other countries - such as the UK, Australia, Brazil, China and India - will use regulation of the financial services industry to speed transformation.

Commenting on the analysis, Senthil Ravindran, global head of xLabs at IT services company Virtusa, said: "As Gartner’s figures show, banks and financial institutions have work to do if they’re to avoid fading into irrelevance."

He added that emerging disruptive tech - such as machine learning, robotics, virtual reality and blockchain - are building on the foundations laid by technologies like mobile and cloud, and beginning to change legacy banking models.

“Banks should also be looking to form collaborations with FinTechs and banking startups that have the expertise in technology, but less experience of financial services,” he concluded.

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