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After a decade of coping with the fallout from the credit crisis, the financial services sector is emerging into a bold new future, even as it has barely had a chance to take a breath. The pace of technological change in the industry threatens to turn established business models on their heads — from digital disruption forcing businesses to build completely new sales channels; to digital banks built from scratch by players from outside the sector; to the advent of blockchain, which brings a revolution in so many sectors.
This financial services sector report, published alongside this year’s Global Corporate Divestment Study, highlights the ways organizations are exploiting the opportunities presented by technology to counter competitive threats. Divestment is a crucial part of this process: companies are realigning their business portfolios to cut costs, better reflect their emerging strategies and free up resources for investment in their new priorities.
The advent of sophisticated analytics capabilities is also giving the sector a means by which to secure better value from divestments.
Long-established businesses in both retail and investment banking are already being disintermediated by technology. Others are disrupting their own business models to survive and thrive. More than three-quarters of banking executives (83%) expect to initiate their next divestment within the next two years, amid speculation that dealmaking will reflect the macro shifts affecting the industry.
Insurers in many markets are struggling with poor returns and unsustainably high operating costs on existing products, combined with the need to reposition their capital towards innovative growth opportunities.
Technological innovation offers insurance companies opportunities to achieve growth and obtain significant operating efficiencies. More than half (61%) expect the number of technology-driven divestments to increase over the next 12 months, ahead of their peers both in banking and in wealth and asset management.
Wealth and asset managers are facing increasingly diverse demands from their client base. Over the past three years, the sector has overwhelmingly trended toward passive fund investment, which underlines the difficulty of aligning the price-value equation in the sector. Equally challenging is investor appetite for low-cost beta solutions, and high return alternative alpha pairings in portfolios.
In virtually all cases, wealth and asset managers recognize the imperative to act strategically and decisively: 24% say they have made between five and 10 divestments over the past three years, well ahead of their sector peers.
FinTech, blockchain, bitcoin, e-payment, robo-advisors, artificial intelligence, telematics — these have all become familiar terms in financial services, each posing both potential opportunity and threat to any sector that relies on legacy systems and traditional methods for customer engagement.
But instead of diving headfirst into the latest technology, the sector is focusing on the fundamentals. If structural reforms have taught the sector anything, it’s that reexamining the basics can bring significant benefits. For example, many are cutting costs through divestments of noncore middle- and back-office functions.
The financial services company of the future is not primarily concerned with being the biggest, but having the best ecosystem. Collaborative partnerships, cited by 71% of firms, offer a range of back- and middle-office expertise.
For financial companies, the potential value of sorting out back-office functions — and the resulting equity story — can be game-changing.
Both of these approaches offer cost savings without losing access to the expertise needed to maintain these support functions. But this doesn’t make them easy to execute.
While more likely to be introduced in larger global financial services businesses, innovations such as robotic process automation — whether built in-house or via a third party — are attracting strong interest: 42% of financial services respondents indicated that their companies are pursuing such technologies. These companies will need to determine whether such investments contribute more value than the potential savings of divestments that are driven by restructuring.
According to 87% of financial sector respondents, the weak competitive position of a business unit triggered their latest divestment. One-third (33%) made divestments to fund investments in new technology.
These two factors are related: technological shortcomings often affect competitiveness. However, divesting to fix a competitive technological shortfall may disappoint without a strategic rationale.
To reshape a portfolio and compete with disruptive technologies, financial services businesses require a more strategic approach to divestment — governed by disciplined reviews driven by strategic intent and shareholder return, rather than circumstance.
In summary, a regular, structured portfolio review process — designed to support corporate growth strategies, agreed-upon metrics and robust technical analysis — is the surest route to divestment value.
Financial services companies must learn from the analysis that was required for structural reform. What worked, what needs improvement and what could be simplified? Building on prior experience by exploiting technology, such as analytics, to identify core and noncore assets.
Financial Services Divestment Study PDF