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9 DECEMBER 2018
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Friday, 09 November 2018 13:18
Gartner says 80% of heritage companies will fail to survive
Traditional companies will struggle for relevance past 2030

We don’t want to depress you, but if you are working for what are now being called “heritage” firms, Gartner says you have an 80% change of going out of business by 2030.
With the pressure on traditional firms of all kinds – including airlines, retailers, banks, hotels. This research makes thought provoking reading for all sectors, even though it is focussed on financial services.

Gartner says that even those heritage firms who survive, will become commoditised, or exist only formally, but not competing effectively.

By 2030, 80% of heritage financial services firms will go out of business, become commoditised or exist only formally but not competing effectively, according to Gartner.

These firms will struggle for relevance as global digital platforms, FinTech companies and other non-traditional players gain greater market share, using technology to change the economics and business models of the industry.

Speaking at Gartner Symposium/ITxpo 2018 on the Gold Coast, Australia, David Furlonger, VP and analyst at Gartner said banks face a growing risk of failure if they continue to maintain 20th century business and operating models.

“Digital transformation is largely a myth as institutional mindsets, processes and structures stand firm,” explained Furlonger.

“Established financial services providers will have to move faster on digital business by building digital platforms or finding niche products and services to sell on others’ platforms.”

Dangerous strategies
According to Gartner’s 2018 CEO survey, while financial services CEOs continue to prioritise revenue growth, there has been a clear shift toward emphasising efficiency and productivity improvements and the importance of management as growth levers. This shift indicates that digital business is predominantly a channel and transaction automation play, focused on business optimisation as opposed to a transformation.”

Pete Redshaw, practice vice president at Gartner, said this attitude is dangerous. “It underestimates the degree of change that digital technology will bring to the industry.”

Weightless future
“The future of the financial services industry is increasingly weightless, requiring few physical assets to establish or maintain a presence. That makes the industry especially vulnerable to disruption by digital competitors.”

Strong disruptors
In addition, emerging technologies (such as blockchain) offer transformational opportunities by creating trust between parties that do not know each other, without intermediary relationships that incumbent financial firms cultivate. Equally, peer-to-peer consensus algorithms can directly match borrowers to those with money, without requiring a bank to mediate.

“The biggest mistake financial services CIOs make is putting too much focus on technology,” said Redshaw. “They should push their organisations for a more coherent response to digital business — it’s important to set the digital vision and destination first, then think about how to lead an organisation there.”

According to Gartner, of the 20% of traditional firms that will remain as winners, three types will flourish:
Power-law firms: Companies that own a digital platform will use its scale, low-cost infrastructure and the customer information it generates to create new services and enter new markets. Very few (5 percent) of these winning heritage institutions have the ability to become power-law firms.

Fintechs: Individual companies or pure-play/neobank subsidiaries will disaggregate traditional financial services in discrete product areas. They will participate in digital platforms, but will not own them. Less than 15% of the winning group of traditional firms can convert themselves into or successfully spin off FinTechs.

Long-tail firms: The dramatically lower costs enabled by digital platforms will allow some traditional providers to act as service brokers. This is likely for large populations of poor and working-class people around the world that were not profitable customers previously. Simultaneously, they can act as concierge providers of bundled offerings to high-net-worth individuals. Around 80% of winning traditional financial services providers can become long-tail firms.

The speed of digital transformation in financial services partly depends on regulation, as well as customer demographics and behaviours, which will vary from country to country. In some nations, conservative regulations will inhibit innovation, while other countries, such as Australia, Brazil, China, India and the UK, will use regulation to speed transformation.
 
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