Financial services firms are trying to build the firm of the future, but their lack of progress is stoking deep skepticism among investors, according to Oliver Wyman's annual State of the Financial Services Industry report. Only 25 percent of investors surveyed are confident that firms' digital transformation strategies will be effective, and less than 1 percent believe the plans are both clear and credible.
"The need to invest and build the firm of the future is pressing, but the window to deliver is closing and a reckoning is inevitable," said Ted Moynihan, Managing Partner and Global Head of Financial Services. "While some breakthroughs are occurring, macroeconomic conditions are going to put a lot of pressure on investment in areas where there has not been a positive enough impact yet on the bottom line."
According to the report, When Vision and Value Collide, financial services firms spend an average of 5 percent of revenue per year on transformation -- but investors say they do not understand what firms are investing in, or why. They don't know what transformation includes or what the endgame looks like. Investors don't receive useful metrics on progress, and they are distrustful of the cost-benefit case of significant technology investments.
The ambitious, large-budget transformation programs banks talk about and the actual return they produce have left the investor community struggling to make sense of what is really happening. Ninety-eight percent of European banks mentioned "digital" in their external communications, compared to only 27 percent of analyst research reports.
The Window is Closing
This disconnect is happening at a time when valuation growth among big tech and fintech firms has eclipsed financial services. Since 2010, price-to-earnings ratio for fintechs have steadily risen, with multiples now twice financial services firms. Banks have seen the price-to-earnings multiple fall from 14 times to 11 times.
In mature markets, low interest rates have already delivered cyclical revenue declines that are worse than any digital disruption. Oliver Wyman estimates that 75 percent of the value erosion in European banking has come from macro factors and regulation, and only 25 percent from new entrants, fintech and margin compression. A further downturn could have a severe impact on investment budgets.
The major recessions and financial crises of the past 30 years have coincided with single-year losses for banks of between 10 and 50 percent of revenue, likely far exceeding the funds available to invest.
While revenue growth is low and macroeconomic conditions are deteriorating, the need for financial services firms to invest in transformation remains pressing. Challenging returns and overcapacity mean a step-change in productivity is often needed. Longer-term, the increasing competitive pressure from technology companies will increase the pace of financial services offerings being brought to the market.
When Vision and Value Collide, Which Will Win?
Some firms have backed their vision mindset and spent aggressively on innovation and transformation efforts, often with disappointing bottom-line results. In other firms the value mindset has dominated, leading to a myriad of small changes with known but often low-impact outcomes.
Firms will need a mix of both vision and value mindsets to succeed over the short and long term. Right now, firms are struggling to get investment to their strategic priorities, with 40 percent of change budgets still going toward mandatory regulatory changes. Light touch management of digital initiatives will come to an end, and a more disciplined, interventionist approach will emerge.
Oliver Wyman see five keys for firms to get the balance right: 1) take a surgical approach to investment, avoiding me-too digital capability building; 2) focus on a smaller number of well-funded growth initiatives; 3) increase focus on productivity gains from investment in technology; 4) develop better science on how to measure and manage change; and 5) improve external communications so investors can better understand what drives performance and allow progress on long-term change to be tracked.
"Winning firms will need a mix of both the vision and value mindsets, but many will get the balance wrong," concluded Moynihan. "Each company needs to find the right mix to bring vision and value together and agree on a path forward ? all while the threat of big tech looms, a recession may be coming, and investors are growing increasingly impatient."
About the Report
When Vision and Value Collide is Oliver Wyman's 23rd annual State of the Financial Services Industry report. This year's report features insight from a survey of investors, analysts, and management teams and analysis of investment levels and progress. The report is broken into three sections ? investor pressure, the closing window to deliver, and how companies can make the vision/value mindset collision work for them. The report will be discussed at a panel during the World Economic Forum Annual Global Meeting in Davos on Tuesday, January 21.
About Oliver Wyman
Oliver Wyman is a global leader in management consulting. With offices in 60 cities across 29 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,000 professionals around the world who work with clients to optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC). For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.