Most of the financial industry’s value creation is being driven by new players, yet rising interest rates may provide the boost incumbents need to fight back.

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At a time when the financial system is purportedly resilient and in good shape to support economic growth, where growth and value creation are taking place is anything but stable, according to Oliver Wyman’s State of Financial Services 2022 report, ‘The Tectonic Shift Between Risk, Data, and Technology’.

“We see a significant shift taking place as data and technology drive faster growth in new capital-light services, with a different set of winners to date. This shows up in the structure of the industry — nearly a third of the top 50 financial institutions are now data and technology firms rather than regulated balance sheet firms, up from just two a decade ago,” says the report.

The main driver of this shift has been slower growth of more capital-intensive risk intermediation services — which have grown globally at about 3% per year over the past decade – relative to the faster growth of more capital-light services linked to connected data services and value technology services, which have been growing at about 10% per year.

Oliver Wyman estimates that the top incumbent firms in the industry have increased their market value by 70% over the past decade, delivering $1.3tn in new value, while a combination of large financial infrastructure, data and fintech firms have delivered 400% value growth and nearly $2.3tn of value.

While there has been an enormous amount of work by incumbents over the past decade to digitally transform, much of this effort has been defensive. And they are facing ever greater incursions from big tech and fintech firms.

Oliver Wyman believes that big tech competition in financial services is going to accelerate with the launch of powerful wallets and the growth of embedded finance. In addition, the emergence of digital assets and digital identification will amplify and accelerate the value shift. (A shocking statistic: there are 2.9 billion active gamers in the world who are arriving first into the metaverse.)

However, current market and economic conditions, including rising interest rates and investor scepticism of unproven tech and fintech business models, may provide an opportunity for incumbent firms to regain share, according to Oliver Wyman. “The core risk intermediation services of incumbents will likely also prove more lucrative in the coming years as interest rates rise, and this should present an opportunity for incumbents to fight back.

“The incumbents that thrive in the next decade will make a bigger pivot now — and if they can do so, the opportunities will be huge. Rising interest rates might provide an earnings boost that will allow headroom to invest more in new value growth,” says the report.

Clearly, incumbents need to go on the offensive and turn their organisations to investing in scaling new services and strengthening their customer relationships, not returning earnings to shareholders at this critical moment.

The report ends with several possible game changers including: a $1tn big tech bank or insurer; a $1tn big tech and global systemically important bank joint venture; private mega-carve-out from a big bank or insurer an Alphabet-like structure for a major bank or insurance company that allows private equity growth of its data and technology platforms; a cross-border distributed ledger finance and logistics category killer.

There are some initiatives already afoot. Yesterday, Ant Group, the fintech subsidiary of Chinese tech giant Alibaba, soft launched its wholly owned digital wholesale bank, ANEXT Bank, in Singapore. The new bank also signed a deal with Proxtera, a metahub platform, to “transform and enable holistic cross-border trade among small and medium-sized enterprises (SMEs) and businesses through making marketplaces efficient and discoverable globally, with embedded financing, fulfilment services and SME empowerment”.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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