As digital technologies change how people live and work, financial services firms need to choose how they will adapt to a broadly reordered marketplace.

To stay competitive in their existing core businesses, financial service incumbents will need to invest in digital transformation much more deeply than they have previously in order to realize dramatic cost reductions. However, retooling existing businesses for digital efficiency will not in itself create shareholder value. Competitive pressure will mean that most cost savings are ultimately passed on to customers. Digitizing incumbents’ existing businesses, if done well, will preserve shareholder value, but not increase it.

Incumbents looking to grow shareholder value will need to build and sustain new competitive advantages. In the report, we discuss how incumbents can do so by organizing their overall transformation journey using three archetypes inspired by the tech industry: demand aggregator, platform provider, and component supplier. Each archetype describes a differentiated role a firm (or business unit) can play in a modular financial services ecosystem, as well as the capabilities it needs to focus on which will provide it with sustainable competitive advantages. In addition, the report explores the broader organizational implications of each archetype, and management actions that can guide an incumbent’s journey to building competitive advantages and increased shareholder value.

Retooling incumbents’ businesses for digital efficiency will not in itself create shareholder value

John Lester, Partner, Oliver Wyman

A conversation with the authors of The State of the Financial Services Industry 2017

Source of sustainable advantage

Unique edge experience designed around customer needs empathy moments.

In the example ecosystem shown, DA Bank is acting as a demand aggregator, serving a home-buyer with a seamless combination of its own products with externally sourced home insurance.

Key capabilities

Behavioral science & customer research
Highly refined customer segmentation & profitability model based on "personas"
Data-driven marketing and experience metrics
Human-centered design discipline for unpacking customer edge experiences and end-to-end journeys
Solution design and assembly

Source of sustainable advantage

Partner ecosystem orchestration to address broadest range of needs or specific needs, by removing friction and setting standard(s).

In the example ecosystem shown, the Home Insurance Exchange is a platform provider, connecting insurers to home owners in need of insurance (indirectly in this case).

Key capabilities

Partner ecosystem development and management
Web-scale transaction processing
Integrated sales and marketing
Open API architecture/streamlined process for inbound integration
Data and transaction processing efficiency
Real-time partner reporting and data/analytics services

Source of sustainable advantage

"Plug and play" product manufacturing, easily "pluggable" to multiple demand aggregators, often powered by balance sheet.

In the example ecosystem shown, the Home Insurance Providers are component suppliers, providing best-in-class products to multiple demand outlets.

Key capabilities

Compliance with stringent regulatory and supervisory requirements
Business development for orchestrating and assembling complementary components, modeled on hi-tech model (e.g. Salesforce.com)
Product feature & pricing optimization
Plug and play product API architecture for outbound integration
Balance sheet forecasting and asset/liability optimization

To grow value, financial services incumbents will need to select an archetype (a differentiated position in emerging supply ecosystems), and then align capabilities, investments, and the entire operating model with that choice

Rick Chavez, Partner, Oliver Wyman