I believe we’re at the beginning of a decade-long (or more) cycle of disruption and structural change in the financial services sector. We’ve seen structural change across many sectors in recent years, but financials are “late to the party,” with the global financial crisis and its aftereffects having put innovation and disruption on a long pause. Now, though, I think the change is coming, fueled by several key drivers — and with the growth in digitization and other trends during the pandemic serving as a massive accelerant.
- The adoption of big data and cloud computing. This may be a universal theme across many sectors, but it’s early days for financial services. Based on our research, we estimate that 5% of banks can open an account online for a customer from end to end, and we believe that big data and the cloud will unlock a solution for a much larger customer base.1 The online mortgage process is another area that doesn’t work well, with far too many manual steps still required and many opportunities to digitize the workflows as new technologies take hold. Insurers, for their part, are only just beginning to incorporate big data in areas like their underwriting processes.
In time, we should see a near-total rewiring of the financial infrastructure. I think it will touch many industries, including the service providers and back-office software companies serving financials, and leave numerous “haves and have-nots” among the incumbent banks and insurers.
- The democratization of financial services. More than 60 million Americans are underserved by this sector, lacking access to good financial services in areas like credit and checking accounts.2 But so-called neobanks and tech companies can use digital and mobile technologies to create better user experiences in banking services, access to credit, and investment capabilities — and we believe they can do all of this faster and cheaper.
Neobanks, for example, can acquire a customer at about a third the cost of a traditional bank but still potentially derive the same lifetime revenue per customer. From an incumbent’s standpoint, that’s a very dangerous formula. All of this is driving market-share shifts in deposits, lending (auto, mortgage, consumer), and brokerage assets away from the incumbents.
- Financial inclusion in emerging markets. This opportunity is not limited to the US. We’re seeing fintech-related disruption in big population centers like India, Indonesia, and Brazil. It’s creating a more level playing field for the “underbanked” and helping to reprice financial products. Many incumbent financial institutions have still not invested in tech and yet offer poor access and high prices. That’s starting to change, with fintech companies finding innovative ways to offer more reasonably priced products to emerging market consumers and taking share from incumbents.
Importantly, this is a vast opportunity set with thousands of public and private incumbents and disruptors, and it’s still developing. We think there will be over 100 IPOs of fintech companies over the next 24 months, for example. In other words, the groundwork is just being laid for many innovative companies to build their businesses, and the resulting disruption will leave both winners and losers in the market for investors to sort through in search of opportunity.
1Source: Wellington Management, 2021.
2Source: Federal Reserve, 26 March 2021, Economic Well-Being of US Households.