Financial services incumbents thrive amid industry disruption

While digital disruption has upended many customer-centric businesses, financial services incumbents have more than weathered the storm. According to new research, almost half of UK consumers would never buy a financial product from a FinTech.

Over the last few years, a growing number of reports have been talking up the impact of digital disruption in the financial sector. As new challenger banks and FinTechs attack business models across the banking landscape, experts have claimed repeatedly that newcomers are rapidly making inroads into the sector’s profits by offering agile, digitalised alternatives. These studies often point to retail banking, where the trend is most visible across the value chain, from customer contact and lending to mortgages, payments and alternative financing.

However, a new study contends that this may have led financial services players to over-estimate the level of disruption in their segment. According to research from Big Four firm PwC, the market share occupied by new entrants in financial services is far less than in other more disruptive industries.

PwC found that after 10 years of having launched as a new entrant, financial services challengers were struggling to account for as much as 20% of the market, compared to industries such as hospitality, where firms like Airbnb can account for half of the market, or taxi services such as Uber, which now hold a respective market share of around 70%.

The study found that within financial services, newcomers in the personal transactions segment were faring best – distantly followed by challengers in SME lending and transactions, who have managed to secure just under 10% of their respective market. However, newcomers in personal lending, personal general insurance, retail investment companies and SME insurance have all struggled to get off the ground, with disruptors collectively accounting for less than 5% of their markets 10 years after launching.

PwC suggests that incumbents have generally been able to withstand the challenge of new entrants and maintain their leading market share position. The study found that 48% of British consumers would not consider purchasing any financial product from a FinTech, while 19% of British consumers said they would consider switching their main current account provider in the next two years. This is supported by recent Capco research, which found that for all the hype surrounding ‘digitally capable’ FinTechs, just 3% of Generation Z currently opts to use challenger banks.

The lack of progress enjoyed by financial services challengers may well be linked to the historical ability of incumbents to cope with fresh challenges. Time and again many financial institutions have had to cope with large crises – sometimes over centuries of business – meaning they rarely rest on their laurels when it comes to their position in the market. While having a trusted brand helps, they have had to continuously freshen their offerings to combat customer apathy.

This means that incumbents in the financial sector have been very willing to leverage their existing capital to invest in innovation. With merger and acquisition costs currently riding high, incumbents are presently favoured in trying to buy up competition, while building more digitally capable offerings. With that being said, incumbents are by no means bullet-proof, and the researchers warned that they are unlikely to enjoy the benefits of disruption if they do not work with newer market players.

Sheetal Vyas, Lead Director of PwC’s Disruption practice, said, "Megatrends and emerging technologies are reshaping the world we live in at an ever increasing rate. 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.”