Future of Financial Services: 2020 series

How do you make the most of your competitive potential in 2020 and beyond?

Our thought leadership series provides insights on the way forward.

There are huge forces at work in the global economy today – from a shift in global economic power and climate change to urbanisation, demographic shifts, and more.

Seeing the future clearly and developing a proactive, strategic response – rather than simply reacting to events – will set apart the winners from the losers in a fast-evolving market.

Each of these forces will shape our lives in many ways. But for the financial services industry, as the post-Financial Crisis regulatory wave retreats, technology stands above the rest.

In our future of financial services series, we look at these changes, and offer some suggestions on how to prepare for the opportunities and threats ahead.

Our latest reports:

The more things change, the more they stay the same

Life insurance serves a valuable role, providing Australians with peace of mind, knowing the future is provided for should the worst happen.

And yet in the past decade the sector has seen significant change and increased public scrutiny. Customers are demanding new modes of engagement and demographic changes are challenging assumptions about existing products. Trust remains an issue no one has addressed.

Foreign entrants are increasing competition, but also providing opportunities for collaboration and value capture. Increasing claims costs are driving down margins just as technology is lowering barriers to entrants. The pressure on profits is unlikely to abate and capital requirements will remain substantial. To succeed, insurers must think differently about creating value for customers – there is an untapped market for integrated solutions combining traditional products and value-added services.

Some will not meet this challenge and exit the market – those who stay need to create a sustainable, differentiated position that puts ‘solutions’ at centre stage.

The last decade has seen immense change. Insurance is now rated as the #1 sector ripe for disruption. To anyone in the industry, the question is: Is it actually worth being in the life insurance business? We believe the answer is ‘yes’, but we would add ‘but only if it fits your purpose and core capabilities’ – and even then you need focus.

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Simpler, smaller and more deeply connected to customers

The Australian banking sector is in a state of flux. Renewed debate about culture and reputation, as well as uncertainty around the pace, scale and breadth of strategic disruption to the industry, mean that the bank of the future will look very different to the bank of today. Bankers, regulators, directors and investors would do well to ask:

  • What is the state of Australian banking today, and how is it changing?
  • How should the industry respond to these changes, and what will it look like in the future?
  • What can individual banks do today to win in the new environment?

Six powerful forces are shaping the banking industry in Australia today: changing demographics, technology, consumer behaviour, Asia, government and a subdued global economy. These forces are driving change at precisely the time when traditional value drivers for the industry – asset growth and, to a lesser extent, leverage – are dissipating, and may even reverse. As a result, return expectations and the future outlook for the industry are being revised down with almost every earnings announcement.

To continue creating economic profit for shareholders, banks need to become simpler and smaller, but more deeply connected to customers than they have been in the past. How? We propose six fundamental priorities for banks in the years ahead:

  1. Explicitly organise around the customer.
  2. Simplify the offer, face and voice. 
  3. Optimise the footprint throughout the value chain. 
  4. Focus on specific areas of innovation. 
  5. Proactively embrace regulation. 
  6. Put culture to work.

The winners – those who can successfully navigate this landscape – will also be more valuable than they are today. They will have more diverse sources of income and more sustainable economic profit. But this will not apply to everyone, and possibly not even to the industry as a whole.

For perhaps just the third time in three decades, the industry is poised for fundamental realignment. Managing this transition, and the timing of necessary changes, will be crucial to success in the years ahead.

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