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THE STATE OF THE FINANCIAL SERVICES INDUSTRY 2018 THE CUSTOMER VALUE GAP: RE-CALCULATING ROUTECONTENTS Prologue 3 1. Introduction 6 The Gnawing Sense of Concern 2. Big Tech 8 Lessons Learned 3. Focus on Big Customer 1 4 Problems The Mass Market Conundrum 4. Design Active Solutions 22 Solving for The LifeMap 5. Get on the Growth Flywheel 30 Harnessing Innovation for a Virtuous Cycle of Growth Epilogue 34 What To Do PROLOGUE Dear reader, Consider what has occurred to help you reach physical destinations in the roughly 10-year period while the financial services industry recovered from crisis: Printable directions from home You used MapQuest to plot a course from point A to point B. You printed out a map and hoped for the best Personal GPS You had a device in your car . If you got lost or changed your mind, you could stop and re-plot Mobile-friendly GPS mapping You could bring that device with you wherever you went, and it would automatically point you to a new direction if you took a wrong turn Live-trac route mapping Your device would recalculate your route if it saw a problem ahead Frictionless ride-hailing service You could tap your device to get a car to meet you wherever you were, and take you to wherever you wanted to go Driverless car You can skim this paper while your car stays on course 2006 2007 2009 2012 2015 Today Now, take yourself back to 2006. Which would you have considered more likely in ten years: 1. Help plotting a secure financial future, and good daily advice to get there, or 2. A car that drives itself? And which of those would be more valuable to you? For the vast majority of consumers, financial direction is far more valuable than the driverless car. Someone is going to build Google Maps for financial lives with potentially revolutionary implications. Maybe it will be Google, Amazon or Alibaba. Maybe it will be JPMorgan Chase, BBVA, or MetLife. But it is going to happen. In this 10-year period, the financial services industry has come from the brink of disaster towards relative health. In the same 10-year period, a group of spectacularly successful technology firms has gone from being seen as irrelevant to financial services, to a point where they are considered behemoths whose threat to core financial services is contained largely by the hope that they do not want to be regulated. We believe this is outdated analysis. Similarly, we do not think the growing regulatory headwinds they face will dramatically alter their momentum. Even if you do not agree with this, we believe that financial services players urgently need to consider how these firms are systematically creating new value for customers and thereby driving growth, both of which we argue are fundamental challenges for the financial services industry today. Our conclusion is not that the industry needs more innovation, but that it needs to harness innovation towards creating better customer outcomes at the risk of self-disruption, and in some areas, the risk of short-term loss of shareholder value. And it needs to do so quickly, or continue to watch underlying growth and relative value shift elsewhere in the economy. This is a report about people. Well meet Daniel and Shelly, who want to put their children through school; Patricia, who wants to pursue her career dream and be able to raise her daughter at the same time; Paul, who is struggling to grow his small business. These people are willing to pay in exchange for value for help to solve their problems with an experience that makes their lives better. But there is a big customer value gap today, and it is unclear who is going to close that gap and reap the rewards. Understanding this value gap and what can be learned from Big Tech about what to do about it is the subject of this years Oliver Wyman report on the future of financial services. We hope you enjoy our research and perspectives. Yours sincerely, Ted Moynihan Managing Partner and Global Head, Financial Services, Oliver Wyman 3We want to help Sue and Greg have whatever future they want. But we are not clear how to help them get there. UNIQUE PEOPLE, UNIQUE NEEDS, UNIQUE SOLUTIONS I want to retire as early as possible and enjoy life Ive worked day and night for the past 20 years. I took over the business from my father a couple years ago. We have been struggling recently, now that more and more customers order groceries online. I want to grow our family business but I lack the resources. and if they were to enter financial services in full force, they would still face significant regulatory challenges. Meanwhile, FS incumbents have largely addressed the biggest regulatory challenges and retain one key advantage: customer trust. The remainder of our report aims to provide insight on how financial services firms can bridge the customer value gap. The core lessons are inspired by recent technology leaders, although elements can be found in growth leaders that established their business models far from the digital realm. 6Exhibit 1.1: th E GNAWi NG SENSE OF CONCERN GROWTH SIGNIFICANTL Y LAGS SHAREHOLDER VALUE ACCUMULATION AND GROWTH LEADING GLOBAL FIRMS US Others 600 80% 60% 40% 20% 0% 27% 12% 6% 500 400 300 200 100 0 0 30 60 90 120 150 180 Big Tech Top- 10 Retail AVERAGE YEARS IN BUSINESS AVERAGE MARKET CAP , $ BN, AUGUST 30, 2017 HISTORICAL FOUNDATIONS HAVE DETERIORATED “RISK FREE” DEPOSIT REVENUE AS A % OF TOTAL BANK REVENUE TRUST & SECURITY ACROSS INDUSTRIES Trust I trust my provider to act in my best interest Security My provider protects my personal information and any other assets in their care Top- 10 FS The largest nancial services rms in the world trace their histories back, on average, nearly 150 years. Over that time they have experienced periods of faster and slower growth. But in recent years, they have been far outpaced by emerging global technology and retail leaders. Among these, the largest ten consumer tech leaders (Alibaba, Amazon, Apple, Facebook, Google, Microsoft, Netix, Priceline, Samsung, and T encent) have reached an average market cap 2.3x that of global FS leaders in just 1/5th the time. Our global survey of 4,000 mass and mass auent consumers in United States, United Kingdom, France and Australia indicates that despite some recent challenges, consumers still trust their providers of nancial services products more than their providers of retail and technology services. This result diers from ndings of other surveys that often ask the trust of the sector broadly (rather than of a specic rm). T rust, while fragile, is still an asset that many nancial services rms have, and they must both protect it and nd opportunities to build from it. 1980 1990 2000 2010 64% 46% FS NONFS 51% 39% The long-term decline of base interest rates has dramatically reduced the contribution of “risk-free” (without credit or interest rate risk) deposit returns to banking. With no expectation that rates will return to historical levels anytime soon, rms must evaluate how they will replace this source of signicant economic prot as well as how its diminishment changes the balance of power between rms with and without a deposit base. Similar dynamics in terms of erosion in legacy business values are also observable in insurance. 3-year market cap CAGR THERE IS STILL TIME TO DO SOMETHINGBUT TIME IS RUNNING SHORT % OF RESPONDENTS THAT STRONGLY AGREE Note: “Top-10 Retail” category consists of largest consumer services companies by market cap globally (excluding Alibaba and Amazon, which are included in the “Big Tech” category). “Top-10 FS” category consists of largest banks and insurance rms by market cap globally. 3-year CAGR is calculated based on 2013YE 2017Q2 period Source: Thomson Reuters Datastream, Oliver Wyman Analysis Source: 2017 Oliver Wyman Global Consumer Survey Note: Deposit contribution % is calculated as net interest income on deposits (excluding fees) divided by total revenues net of interest expense and charges for impairment. “Others” category consists of UK, Australia, France and Canada Source: S&P Market Intelligence, Thomson Reuters Datastream, various central banks, Oliver Wyman analysis 7
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