Report: The State of the Financial Services Industry 2022

Oliver Wyman: “With climate data, digital wallets, embedded finance, digital identity, digital assets, central bank digital currencies (CBDCs), and the Metaverse all taking root, the scope for growth in capital-light financial services is huge. We see many avenues of attractive growth for big tech, data, technology, and infrastructure firms in financial services.”

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The financial services industry is, at one level, a story of stability over the last decade

First and foremost, there hasn’t been a major financial crisis since 2008. This is a far cry from the experience of the previous 20 years, when a crisis of reasonable scale hit the financial system every four to five years.

This greater level of resilience has allowed the financial system to play the shock absorption and policy transmission roles for which it is at least partially underwritten by governments and societies in three major ways:

• COVID-19 turned out to create far lower credit losses than planned for. The financial system played an important role of economic shock absorber, with excess capital able to absorb a high projected level of economic losses that did not come to pass, allowing financial services companies to write back up much of what they had written down.

• In the war in Ukraine, the financial system has acted as the primary instrument of economic sanctions policies, shutting off Russia from most cross-border and international financial interaction with the West, and absorbing or managing actual losses in the financial system without any major signs of contagion risk so far.

• On climate, financial services firms are playing a leading role, making ambitious net zero commitments and beginning to pour huge investment into helping corporate and retail customers to achieve their own net zero transition plans over the coming years.

The underlying driver is the shift in value from lower growth/high-capital risk intermediation services to higher growth/lower-capital data and technology services

Capital is piling into financial services and has been earning rich rewards, but only in certain parts of the system and with certain types of firms, causing significant shifts in value. To better understand the value shifts, one must look further back in history to what was a golden age for financial services from the 1970s through the 1990s. Over this period the industry grew two to three times faster than GDP, as people and businesses bought more financial risk intermediation services. Governments sold off assets and borrowed and encouraged homeownership; industries like pensions, savings, mortgages, and insurance took root, first in developed and then in emerging economies; and consumers and businesses took on more financial leverage — all structural drivers of outsized growth in financial intermediation.

The new financial services industry emerging

So financial services is expanding and growing in all sorts of ways, attracting capital from many sources and garnering more and more involvement from big tech. There are opportunities galore, but the nature of these opportunities has changed. We break out the emerging industry into the following service segments:

Risk intermediation services. We define this as any service that involves matching those who have money with those who need it, while the provider takes some financial risk along the way — be that credit risk, market risk, interest rate risk, and so on. Of course this is the core of the incumbent industry, risk intermediation services are now extremely high capital intensive, and with ultra-low interest rates for a decade they have been in low-growth mode. No doubt the shift to rising interest rates will change this and lead to better returns for risk intermediation services, but the penetration of risk intermediation services with customers is mature if not saturated, so the growth is akin to a rising tide lifting all boats, not new value creation as defined by new services to new customers.

Value technology services. We define value-technology as technology that is being used to deliver a new service to an end customer, rather than just improving an operation or function. The industry has experienced a 10-year explosion in growth in payments and transaction-related services, most of which were garnered by merchants including big tech companies such as Alibaba, Amazon, and Ebay, as well as new players like Paypal, Square, and Circle. Focus is now shifting toward monetizing new technology such as digital assets, tokens, and decentralized finance. At the same time, both incumbents and new players are looking for winning models in wholesale services such as through banking as a service (BaaS) and insurance as a service (IaaS).

Connected data services. We define these as services that rely on using data or connecting different sources of data to create value for customers, such as helping customers manage their financial health or making it easier to manage logistics, real estate, mobility, health, and so on. Initiatives like open banking have not yet led to the sort of data-sharing explosion envisaged, but the acceleration in growth in wallets, financial life coaches, embedded finance, and so on all show that the potential from connected data services is being realized.

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