Drones to add £21 billion to UK public sector and financial services

29 May 2018 Consultancy.uk

New research by PwC suggests that the ‘drone economy’ could add £42 billion to UK GDP by 2030. The firm’s drone report outlines the huge potential productivity and cost savings that a fleet of some 76,000 drones in British skies could bring to the public and private sectors.

Drones – unmanned aerial vehicles operated by a user on the ground – exist in a legal grey area. Used by the British military overseas and for security purposes at home, more rudimentary drones can also be bought online and used by hobbyists – a growing cause of concern for privacy advocates.

Autonomous drones are presently illegal and strict air traffic control regulation demands that all drones be flown within their operators’ line of sight. A licencing system for commercial use is still evolving and the first Amazon Prime Air drone deliveries slated to debut in 2019 when legislation relaxes to encourage innovation.

By 2030 the skies above Britain will be a very different place. Big Four professional services firm PwC estimates that, rather than today’s chaotic swarm of private toys, there will be a highly coordinated hive of more than 76,000 sophisticated drones performing all manner of tasks. The accounting and consulting firm’s UK drones report confidently predicts that Britain’s new drone economy will employ more than half a million people and be worth tens of billions to GDP.

More than a third of the future drone fleet will be used by public sector agencies. Defence, health, and education are cited as those with the most to gain. The primary generation of jobs and wealth will come from private sector harnessing the new technology. All in all, drones are projected to add £42 billion to UK GDP within 12 years – a 2% increase. An estimated £16 billion will come from net cost savings and some 628,000 people are expected to be involved in designing, building, operating and regulating drones.

How much economic value can drones deliver by 2030?

The GDP benefits are expected to be most profound in the struggling retail and wholesale trade sector. The researchers project a 2.5% increase in productivity, equating to almost £8 billion. In terms of straight forward savings on costs, the Telecommunications, Media, and Technology (TMT) sector will gain the most, with almost £5 billion saved by leveraging drone technology.

The public sector will generate the most economic value from drones, at around £11.4 billion. They will prove indispensable for expensive tasks like fixing power lines and electricity grids and coordinating emergency transport. In the financial and professional services sector, drones have a projected economic impact of £10.4 billion, compared to £8.6 billion in construction & manufacturing. 

"Drones could spark significant improvements in the UK economy,” said Jonathan Gillham, economics director at PwC. “The rise in GDP and job creation from drones uptake are expected to be substantial, but productivity is likely to see the greatest gains. By automating routine tasks, improving effectiveness, safety and reducing costs, drones will free up people to focus on higher-value work."

"Drones have the potential to offer a powerful new perspective for businesses across a variety of industries, delivering both productivity benefits and increased value from the data they collect,” added Elaine Whyte, UK drones leader at PwC. “The UK has the opportunity to be at the leading edge of exploiting this emerging technology, and now is the time for investments to to kickstart our drone industry.

“There is a need for current UK drone regulation to advance to see the estimations in our report become a reality, but it's positive to see the Government already taking proactive steps to address this with the draft Drones Bill.”

While the government gets its Drones Bill in order, PwC is marching on with its own specialist drone division. Clients are keen to leverage drones for their data-gathering capacity and recognise that, as a disruptive technology, it is never too soon to develop drone expertise. Globally, the drone industry has been projected by Marsh to be worth more than $100 billion by 2030.

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The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.