While always negotiating states of flux and change, the consumer financial services industry today faces an inflection point like no other. As digitalization overtakes the financial world, firms must shift their strategies to differentiate on trust and financial wellness—with bundled offerings that swap out product-centric selling for holistic, personalized value propositions.
So how long could this take? Our recently completed NextWave Consumer Financial Services research leads us to conclude that the industry will be reframed in the next five years.
Paradoxes situated as the heart of the industry highlight the need for reframing. For one, most consumers believe they are financially healthy, even though a wide variety of data shows they aren’t. A full 83 percent of consumers rate their financial health as either “excellent,” “very good” or “good” — even though it’s clear that U.S. consumers today spend and borrow more, save less and don’t focus enough on their long-term financial futures. Large percentages of Americans can’t meet a $400 emergency, lack sufficient retirement savings and experience higher levels of financial stress. Viewed one way, consumers need to figure out these issues for themselves. But the question also arises: Can the financial services industry bolster financial health and wellness, and in the process earn consumer trust? From a consumer loyalty standpoint, it’s an issue worth exploring.
At the same time, financial services organizations do not generate alpha (i.e., an active return on investment) especially when compared to high-tech firms. In fact, the growth rate of financial services firms most highly correlates to overall GDP growth, which signals that the general economy acts as its primary driver as opposed to any distinctive competitive advantage. The bottom line? The financial services industry must develop new, relevant ways to serve consumers that integrate into their everyday lives.
Shaping the next era: Three predictions
Our research consisted of interviews with dozens of senior business, digital, product and technology leaders across the banking, wealth management, insurance and technology industries—as well as a primary research study of 1,500 mass-market, mass-affluent and high-net-worth consumers. Our methodology sought to measure and understand the impact and appeal of holistic financial value propositions, based on 26 retail products, 74 unique features and 173 different attributes.
Our research focused on the underlying reasons consumers engage financial firms—that is, the life events and goals that drive financial needs, and how these moments influence financial preferences and behaviors. Based on the results, we developed three market hypotheses that we believe will shape the next era of the consumer financial services industry.
1. Shifting trust dynamics will reshape the U.S. financial landscape and prompt the movement of $11.3 trillion in assets during the next five years.
Boards and C-suites must begin to formulate a strategy around trust. Our research analyzed the multidimensional aspects of trust—including customers’ expectations about customization of offerings, price transparency, regulatory concerns, value-added services (such as identity protection), and control and discretion of personal data.
How did we calculate that $11.3 trillion of assets will be in motion during the next five years? Analyzing the delta ratio between industries and customer segment groups identifies where true alpha can be created. Using more sophisticated analyses and simulations, we calculated how shifts in share of preference across industries will impact specific asset pools.
2. Artificial intelligence-driven financial health platforms will become consumers’ “personal financial operating systems.”
Though most consumers want to improve their financial health, significant complacency presents a barrier. Meanwhile, financial firms do not currently offer daily, relevant, interactive engagement to change consumer behavior. AI-driven financial health platforms will increase consumer demand across the industry, but threats loom from fintech disruptors.
3. Consumer finance will become the next subscription model, unbundling products and re-bundling personalized, holistic value propositions based on life events.
As evidenced by the likes of Spotify, the consumer economy has shifted dramatically away from owning and buying toward renting and using. The financial services sector has largely avoided this evolution until now. Subscription-based models will attract consumers because they provide easy, convenient access to a comprehensive bundle of products, services and value-added capabilities.
As we look forward, value will shift from the monetization of products and transactions to the “productization” of user experiences that monetize consumer relationships themselves. The financial service will be disintermediated from the financial product.
The catalyst will be the concept of “the consumer’s personal financial operating system,” a dynamic, trusted and embedded digital experience that helps consumers improve their financial lives through constant, relevant, daily interaction and engagement.
Parting thoughts: Doing well through consumer wellbeing
Delivering these new forms of value will necessitate new business models, but an ample upside opportunity awaits the firms that can get it right. As our research confirms, the future will usher in fundamental changes to the landscape and business models of financial services firms. Incremental approaches to digital transformation, legacy modernization and new product-based offerings will yield only incremental results.
Companies that win the future will execute with focus and purpose to instill consumer trust and help consumers live financially healthier, more secure and more fulfilling lives. Fundamentally, we believe—and our research shows—that increased financial wellbeing and lower financial anxiety can benefit financial services companies through higher and more sustainable profits.
Further, society, as a whole, benefits through a healthier economy and reduced strain on public resources—yet another powerful, positive dimension of alpha that earns an A+.
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Nikhil Lele is partner/principal at Ernst & Young LLP.