Modular Financial Services: The New Shape of the Industry

Oliver Wyman report identifies $1 trillion of banking and insurance revenues and costs to shift

News provided by Oliver Wyman
January 20, 2016 10:35

NEW YORK & DAVOS, SWITZERLAND--(Business Wire / Korea Newswire) January 20, 2016 -- Financial services are becoming “modular”, with digital distribution platforms, new product providers, alternative sources of capital and a growth in outsourcing fundamentally reshaping the industry. This is according to Modular Financial Services: The New Shape of the Industry, a new report by global management consultancy Oliver Wyman.

The Oliver Wyman study estimates that this change could see $1 trillion of revenues and costs shift in banking and insurance, an industry with $5.7 trillion of revenues today. New customer platforms could capture $50-150 billion of revenues from today’s banking and insurance markets, equivalent to several eBays or 1-2%+ of banking and insurance revenue today.

Consumers will benefit most from modular financial services. They will be able to access a wider range of product providers, and the increase in competition will drive margin compression. The report estimates that $150-300 billion of value may migrate to consumers by way of lower prices. Innovative business models based on new technology will capture share, with the potential to capture a further $150-250 billion of existing revenues.

“Modular financial services are emerging at different speeds across markets. Currently, banking in the US is more modular than in Europe and Asia. Property & Casualty insurance has become more modular than Life insurance. Now, the modular industry structure will go deeper and spread to new markets,” said Oliver Wyman Partner and co-author, Matt Austen. “Since the crisis, most firms have focussed on optimising their existing, integrated business model. Now, the industry is going to move towards a new, modular structure.”

The report highlights that large, integrated financial services firms still enjoy significant competitive advantages -- including existing customer relationships, secure at-scale operations and meeting the requirements of regulatory compliance -- and are still well-positioned to succeed. However any costly, inflexible legacy infrastructure will be unsustainable and competition will force a significant overhaul of incumbents’ operating platforms. The report estimates target cost savings for the world’s largest banks may need to be as much as $340 billion. The cost of “replatforming” the world’s largest banks is substantial, potentially more than $4 billion each, larger than the average annual dividend paid by the 100 largest universal banks of $1.7 billion.

Oliver Wyman’s Managing Partner for Financial Services, Ted Moynihan, added: “Even if we do not expect a completely modular financial services sector, the way customers buy financial services and how firms deliver them is going to be transformed.”

The Oliver Wyman Modular Financial Service report is available here.

About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 26 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm's 3,700 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit Follow Oliver Wyman on Twitter @OliverWyman.

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