There is a lot of hype about the level of innovation in the financial services industry. Many new entrants, both start-ups and convergence plays from other industries, are entering parts of the financial services market. While these players are small and mostly focused on market niches today, the question for many bankers is: How real a threat is posed by disruptive entrants?
The challenge for banks is that some of the new entrants aren’t small any more – PayPal has over 120 million active digital wallets, M-PESA serves 18 million Kenyans and Alibaba is now one of China’s largest payments and money management companies, as well as dominating e-commerce services. Many new players are growing rapidly. Square acquired over 4 million merchant users of its mPos device in a matter of years, and American Express Bluebird won over more than 1 million customers in the United States in less than a year.
As part of Accenture’s Everyday Bank point of view, Accenture Research set out to quantify the impact on retail banking revenues from digital disruption in the market.
We analysed the composition of retail banking revenues across the major banks in Western Europe to understand current revenue pools and drivers. Then we looked at seven broad types of digital disruption, such as the growing consumer and SME peer to peer lending markets, the growth of alternative payments and low cost current account alternatives. For each of these we formed hypotheses about the growth of market share and the impacts on volumes and pricing, using market data and analysis of growing disruptors. This enabled us to forecast the level of revenue disruption retail banks could face under a range of different scenarios. What we found was that our central projection, given the scenario of a high level of digital competition where banks were slow to respond, was that 32 percent of revenues could be at risk.
This calculation isn’t just about competition for market share. Many potential disruptors are seeking new ways to meet financial service needs, ranging from peer to peer lenders to money management apps, and from price comparison and rate-setting sites to direct, low cost investment fund platforms . And these new models can upset revenue streams and product margins and change customer expectations, even without stealing share.
This is real disruption – and a wake-up call for banks to transform their own business models, products and services to compete in the world of digital financial services. The Everyday Bank provides a vision for banks to move from the disrupted to the disruptors.