▸ Disconnect Between Long-Term Vision and Short-Term Performance Creating
▸ Collision Course for the financial services industry
United Arab Emirates, Dubai, January 2020: 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 Mathieu Vasseux, Head of Financial Services in the Middle East and Africa. “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 has 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