1、The State Of The Financial Services Industry 2020 THE NEED TO INVEST AND BUILD THE FIRM OF THE FUTURE IS PRESSING. THE WINDOW TO DELIVER IS GRADUALLY CLOSING. A RECKONING IS INEVITABLE. A collision is taking place in financial services between the vision mindset and the value mindset. Many firms hav
2、e backed their vision mindset over the last few years, and as our research shows the need to change quickly remains pressing. However, with persistently low revenue growth and a deteriorating macro- outlook, the clock is ticking on investment. How firms resolve this conflict between the desire to re
3、imagine the business for the long-term and the need to remain disciplined and profitable in the short- term will define the shape of the industry in the coming years. The winners will be the firms that most successfully unite the vision and value mindsets, agree on what is critical to thrive long-te
4、rm, and invest with discipline. The losers will lurch too far in either direction and will fail to survive today or thrive tomorrow. The timing and magnitude of the reckoning depend on segment and region. For European banks facing negative interest rates, smaller US banks getting squeezed, and some
5、asset managers, the collision will be pretty violent. Consolidation in these segments is likely to be part of the outcome. Our findings, which come from discussions with industry leaders, analysis of investment levels and progress, and gauging of investor sentiment, point to several key attributes t
6、hat winning financial services firms will share: A surgical approach to investment portfolios: Successful firms will exhibit great discipline, with investment in me- too functionality, capability building, and regulatory reform managed down quickly and tech investment becoming much more modular. Few
7、er, bigger, growth plays: Many firms have spread growth investment across numerous small initiatives. We anticipate this will change, with emphasis on a smaller number of well-funded, CEO- backed initiatives. Clarity on productivity gains from investment in technology: Winners will be clearer on the
8、 use of technology as a route to drive net headcount costs down significantly, drive up productivity, and thus increase returns. Better science on how to measure and manage change: This is one of the industrys greatest challenges: new metrics and management techniques are needed that can steer progr
9、ess in large scale initiatives, uniting the objectives of both the vision and value mindsets. Better external communication: Investors will reward firms that provide clarity on what drives performance and allow progress on long-term change to be tracked. Collisions can be creative as well as destruc
10、tive. They can lead to balance, reinvention, and growth. In our annual report on the State of the Financial Services Industry this year, we explore how this collision is playing out, and how we believe winning firms will manage it. We hope you enjoy the research as you navigate the change ahead. Ted
11、 Moynihan Managing Partner, Financial Services INTRODUCTION THE MINDSET COLLISION Financial institutions face a big challenge: creating the business of the future from the legacy they have today. There is considerable investment and activity underway to make this transformation. Firms have set up in
12、cubators, accelerators, and innovation teams, often consuming considerable management attention. They have hired chief digital officers and teams, and rolled out new ways of working. Some breakthroughs are occurring. Yet positive impact on the bottom line has been rare, and no firms we speak to are
13、happy with the rate of change. Until recently, this has been a concern but not a crisis. Pressure is now building. Investors, analysts, and management teams in the past year have begun asking questions about the lack of progress from the considerable investments being made. The outside threat is gro
14、wing, not receding, with the big technology companies positioning themselves in financial services. The industry also faces difficult macroeconomic conditions that will put investment budgets under strain. In short, financial institutions are struggling to make and deliver on the investments they ne
15、ed to be successful in 10 years time, while delivering value for shareholders in the short- term. This is now revealing a major tension in the industry between two opposing mindsets: The vision mindset is focused on building the firm of the future. It foresees structural changes to the industry driv
16、en by new technology, changing value chains and ecosystems, new rules of competition, and disruptors setting those rules. A full transformation effort is seen as necessary, with a three- to seven-year investment horizon and a growth narrative that emphasizes customer value. The value mindset is focu
17、sed on delivering financial returns. It sees an industry that has adapted to successive waves of technology and focuses on cost and capital responses to slow growth. Investment should be made only where concrete returns are expected, with an impact in the next one to three years. The industry needs
18、a mix of both mindsets. But in many cases, one or the other has come to dominate. When the value mindset dominates within firms, the result is myriad small changes with known but low-impact outcomes. Short- termism leads to increasingly outdated legacy technology, which holds back future productivit
19、y improvement, and new growth opportunities rarely amount to anything substantial. 4 Exhibit 1: The Mindset tension Proof points that support overall narrative and progress of initiatives Financial (cost and revenue change, ROI) and operational (progress against plan, RAG) Key metrics Competition fr
20、om rivals with stronger capabilities, structural disruption Cyclical downturn driving portfolio prioritization and reduction Concerns Rewards Rigor, transparency, controllability, and continuous elimination of failing investments Potential of breakout growth along with radical business model transfo
21、rmation Risks Failure to invest in unpredictable but highly disruptive themes Wasted resources from lack of discipline or vision proving to be incorrect Spend on strategic and transformational themes without constraint of near-term financials Spend only where financial returns can be reasonably pred
22、icted Investment philosophy YearsQuarters Planning horizon “We need to transform to survive in the digital world” VALUE MINDSETVISION MINDSET “We need to focus on core drivers of returns” Source: Oliver Wyman analysis 5 When the vision mindset dominates, aggressive amounts of spending can go into tr
23、ansformation efforts that dont yield results. Top-down priorities to be customer- focused, data-centric, agile, or innovative get interpreted by every business or function, and projects proliferate. Value disciplines around business impact are missing or ignored, with spending justified by the top-l
24、ine strategy, weak stage-gating, and limited results. This tension is playing out in all segments of financial services. Many firms that backed the vision mindset heavily over the last few years are now taking a hard look at what is working, what will deliver value in the future, and how to reduce s
25、pending. Other firms that took a highly pragmatic approach, or had no bandwidth to consider the long-term future, are now worried about sustainability and where growth will come from. In this years report we present new findings from the financial services investor community, alongside insights from
26、 our work with clients in 2019. We explore the progress of change programs, the rising tension between vision and value, and what the winners will do to get the balance right. Investor pressure building: In the first section, we look at spending on change programs and the investor perspective. It is
27、 clear investors are highly skeptical about existing change programs and do not feel they understand what firms are investing in, or why. The closing window to deliver: In the second section, we look at the changing environment and why it is becoming increasingly critical to deliver on investment. V
28、alue creation has fallen in financial services, progress on productivity is slow, and the outside threat is growing, not receding. Investment is not being efficiently allocated or tracked and will come under strain if the cycle ends. Making the collision work: In the third section, we explore five a
29、reas where vision comes into conflict with value, and what firms are doing to unite the two reassessing the investment portfolio, truly committing to growth plays, making the business trade- offs needed to get the benefit of technology, building delivery around better metrics, and positioning themse
30、lves to get on the front foot with investors. “WE KNOW WE NEED TO CHANGE QUICKLY, BUT WILL THE INITIATIVES BEING PUT IN FRONT OF US GET US THERE? OR COULD THEY BE A BILLION DOLLARS OF WASTED MONEY?” Global bank board member 6 SECTION 1 INVESTOR PRESSURE IS BUILDING Investors are voting with their fe
31、et. Growth in the market capitalization of the financial services industry has been eclipsed by big tech and fintech. The 20 largest financial services firms are worth $800 billion more today than in 2010, compared with $3.8 trillion more for the 20 largest technology companies. The top fintechs, wh
32、ile smaller, saw six-fold growth over the same period, compared with 30 percent for financial services. Technology stocks may be at or approaching valuation highs and greater regulation of the sector is likely. Nevertheless the valuation change relative to financial services is dramatic. Since 2010,
33、 the big tech price-to- earnings ratio has steadily risen, with multiples now twice those of financial services. Financial services have seen the price to earnings multiple fall from 14 times to 11 times, driven by banks, with a widening gap to insurance stocks. Exhibit 2: Financial services valuati
34、on growth eclipsed (top 20 firms) 2010 vs. 2018 AVERAGE PE RATIO1 TOTAL NET INCOME ($billion) TOTAL MARKET CAPITALIZATION ($billion) Big tech 22x17x1352802,1005,900 Financial Services 11x14x2103352,5003,300 Fintech 49x39x 38 +145 2.1x +125 1.6x +6 2.7x 60 360 +3,800 2.8x +800 1.3x +300 6.0 x 1. Medi
35、an price-earnings-ratio Source: Datastream from Refinitiv, Oliver Wyman analysis 7 ONLY 25 PERCENT OF INVESTORS ARE CONFIDENT DIGITAL TRANSFORMATION STRATEGIES WILL BE EFFECTIVE. Oliver Wyman and Procensus investor survey, November 2019 8 We conducted a survey and a series of interviews to find out
36、what investors think about the financial services industry, its response to digital, and current investment programs. This is what we found. Expectations are unclear Many financial services firms have announced ambitious, large-budget transformation programs. In practice, while absolute numbers quot
37、ed for transformation programs can be in the billions or even tens of billions, investment levels are not all always what they seem. The average transformation program being announced calls for spending of 5 percent of revenue per year. Programs can include not just transformation spending but a hos
38、t of other changes that are necessary but not transformative, including IT maintenance and regulatory compliance. Spending on real transformation can be far smaller, reflecting organizations engaged in incremental change, albeit across a broad front. With no comparable datapoints, investors understa
39、ndably struggle to make sense of digital transformation, technology, and investment. As one fund manager put it to us, “It is all jumbled up IT replacement, automation, customer journeys. There seem to be some wins but its anecdotal.” Investors end up being outright skeptical, or discounting change
40、programs and the long-term benefits of digital technology. In the first half of 2019, European banks mentioned “digital” in 98% of their external communications, compared to only 27% of analyst research reports. Investors believe digital is hype, or they cannot analyze the value impact and are ignor
41、ing it. Exhibit 3: Investors focus far less on digital than the firms they analyze BANK PUBLICATIONSANALYST RESEARCH REPORTS mention digital 27 % mention digital 98 % Sources: Eikon from Refinitiv, Oliver Wyman analysis of market communications of 30 European banks: 80+ bank communications, 280+ bro
42、ker reports (June 2019) 9 Exhibit 4: Financial services investment program spend varies widely DISTRIBUTION OF SPEND FOR ANNOUNCED PROGRAMS REVENUE SPENT ANNUALLY ON CHANGE PROGRAM 2%1%3%4%5%6%7%8% 0% 5% 10% 15% 20% 25% Average Sources: Datastream from Refinitiv, company investor presentations and p
43、ress releases, Oliver Wyman analysis Confidence in digital programs is low Financial services firms are struggling to make the case for investment to shareholders. As one major fund manager put it, “There is very little evidence of investments improving banks operating profitability.” Only a quarter
44、 of investors are confident digital transformation strategies will be effective, and hardly any believe plans are well articulated. Investors do not feel they understand what firms are investing in, or why be that for efficiency, growth, or operational resilience. They often dont know what transform
45、ation encompasses or what the endgame looks like, they dont see any useful metrics on progress, and they are largely distrustful of the cost-benefit case of significant technology investments. Financial services firms are seeing their investment initiatives heavily discounted, with skepticism on the
46、 likelihood of delivering return on investment or material business change. Patience may be running out. Optimism exists on productivity Investors might be skeptical about the likelihood of current programs delivering, but 80 percent still say transformation is critical or important in their investm
47、ent appetite. There is some optimism among investors that digital does have the potential to drive earnings improvement. Nearly 60 percent of investors believe digital will impact profitability positively over the next five years. This is seen as coming through productivity: “some cost savings can b
48、e achieved, but it is not a massive revenue opportunity” is the common view. 10 Concerns around implementation costs and the likely transfer of most of the benefits to customers are also common themes among investors. This could drive a growing belief in scale the largest institutions have the firep
49、ower to sustain a large portfolio, make the investments required, strike global partnerships, and tap into larger datasets. Feedback from investors supports this sentiment, although there is not a discernible correlation between size and price-earnings multiples today. Exhibit 5: Investors are unconvinced about investment plans Do you feel that most banks have articulated clear and credible digital transformation agendas when it comes to costs, benefits, and timelines? How confident are you that banks digital transformation strategies will be e
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