How disruption targets the FS industry

Globally, only 20 percent of chief strategy officers in the financial services (FS) industry say they are ready for the coming disruption.

This is alarming, because the industry is under threat. The latest version of Accenture’s Disruptability Index shows that insurance, over the past five years or so, has moved from 19th out of 20 industries in terms of ‘current disruption’ to being one of the most disrupted. And while it has long been rated as one of the sectors most susceptible to ‘future disruption’, this prediction is now even more emphatic!

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Source: Accenture Research Disruptability Index 2.0

Banks’ vulnerability is due to their high labour costs, a reduction in the ‘sticky-ness’ of customers, a weaker commitment to innovation than other sectors and relatively low revenue growth. The insurance sector was given a high susceptibility score because of its low labour productivity, subdued revenue and profit growth, and a weak commitment to innovation alongside significant venture capital investment in start-ups targeting especially the property & casualty and life & health business lines.

Contrast the positions of the Banking & Insurance with those in the Viable quadrant, which include software and platforms, and media and entertainment, and with the Durable industries which include industrial equipment and chemicals.

What this means is that Banks and Insurers will inevitably need to cope with intensifying disruption. Even seemingly impervious companies, which have actively tried to become disruptors themselves, have been disrupted. A recent example from the consumer products sector is Gillette, which actively cannibalised its existing razors by introducing an innovative new range to the market. A young upstart called the Dollar Shave Club turned the way people bought blades and razors completely upside down. That cost Gillette $1 billion because instead of competing, it decided to acquire Dollar Shave Club.

This is supported by market research we conducted in India, which found that although incumbents are spending more and more money on being the disruptor, rather than waiting to be the victim of disruption, profits at the incumbents are generally down.

In 2019 we are witnessing innovation accelerate and the disruption in Financial Services start happening in earnest.

Regulations, customer preferences and the way competitors respond are shaping the landscape in radically different ways for FS firms. The numbers are enormous. In India alone, US$1,8 trillion of enterprise value is currently being disrupted or is susceptible to disruption. If the proportions for South Africa follow what we’re seeing in India, the number is around $135 billion. In Rand terms that’s a staggering R2 trillion.

Three factors are contributing to this large-scale disruption. We have called them “pride, pressure and persuasion.”

  • Pride affects about one in 15 businesses. These are companies that simply believe they cannot be disrupted. If Netflix can disrupt Time Warner, then nobody can afford to be complacent.
  • Pressure is more dangerous. That is where management teams are focused on short term pressure to be profitable, and keep their incentives aimed firmly at maintaining their profit-and-loss leadership quarter after quarter.
  • More insidious is what we call “persuasion.” Many companies feel disruption is too unpredictable to be manageable. They lack a framework for understanding the forces at work, and therefore cannot structure a coherent response to the disruption they know is coming.

The three Ps – pride, persuasion and pressure – are dangerous for Financial Services because the whole industry is vulnerable to disruption. Disruption is very topical in South Africa in the context of the emerging Digital Disruptors and Fintechs in the region.

Learn more about how to manage disruption by downloading The Wise Pivot. Or, contact me to discuss how Accenture’s international research can help you understand and prepare for the coming disruption.