As the world waits for mass vaccination to revive economic activity, general malaise has overtaken the financial services industry (FSI). And things will probably worsen before they get better: US banks are expected to suffer US$318 billion in net loan losses by the end of 2022, according to Deloitte.

But the extraordinary economic impact of the pandemic has only intensified mortal threats to the industry’s business model that have been brewing for years. If the global economy were to recover completely tomorrow, FSI incumbents would still be in a highly precarious position.

In a new whitepaper, we argue that going back to the pre-Covid “normal” is not an option for financial services. Fortunately, the rise of the subscription economy points towards frontiers of untapped growth for the sector.

Shaky ground

Growing regulatory pressures, low interest rates, digital disruptors (both fintech and Big Tech) and savvy customers demanding better experiences at lower costs all have put wide cracks in the FSI’s legacy business model. We’ll confine our argument here to two key revenue streams.

First, the pervasive and persistent low-interest-rate environment has severely impacted profitability since the 2008 global financial crisis. As interest rates are determined by central banks, FSI companies have no control over this destructive and volatile aspect of the business. The Covid-19 fallout has increased downward pressure on interest rates, which have dipped into negative territory in many countries. It is safe to say that there is no short-term end in sight to this trend.

Second, customer fees may no longer be as reliable a revenue source, due to competition from fintech start-ups with no reverence for Big Finance’s customary practice of arbitrarily bundling popular services with less loved ones.

While bundling fosters the perception among customers and regulators that the FSI’s pricing is untethered to value, fintechs have homed in on what customers really want. With tech-savvy and agility outstripping that of incumbents, they have been carving business away from established players – a trend set to accelerate amid Covid-fuelled digitalisation.

An even more formidable enemy than fintech may be Big Tech. Amazon, Facebook and Google have deep and broad reserves of customer data with which to further their encroachment into Big Finance’s domain. Amazon, for example, has teamed up with banks to offer short-term business loans to platform sellers looking to scale up.

The traditional FSI model, therefore, is beset on all sides by fierce competitors and sorely in need of renewal. The plummeting market caps of many large banks – outrun in recent years by fintech and cloud companies – attest to this. By contrast, subscription businesses remain on a general growth path despite the economic downturn, according to research from Zuora.

Shifting to a subscription mindset

The FSI’s troubles largely stem from a well-established inward-looking business model relying on high predictability, stable revenues and rather passive customers lacking bargaining power….

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About the author

INSEAD Knowledge is the expert opinion and management insights portal of INSEAD, The Business School for the World. Knowledge showcases the latest business thinking and views from award-winning faculty and global contributors

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