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The impact of the external environment on the financial services industry

Explore the latest strategic trends, research and analysis Steadily and indisputably, the financial services industry — with which we all interact, whether as borrowers, savers, investors, or regulators — has embarked on a multiyear transformation.

This process, slow at first, has been driven by the combined impact of two sets of durable forces.

  1. Publication does not imply endorsement of views by the World Economic Forum. As a result, a proliferation of financial providers is likely, with particularly bright prospects for institutional partnerships that combine the more agile existing platforms with exciting new content and approaches.
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  3. Over time, this second set of factors will fuel more direct and efficient provision of services to a broader set of consumers, contributing to a reconfiguration of the industry as a whole. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.
  4. In Chapter 12, the tenth P factor, potential, addressed the issue of opportunity and how well the bank seizes on this opportunity as a contributor...

Then there are disruptive influences that percolate up from below: The pricing environment compounds the impact of tighter regulation. Like utilities, established financial institutions are facing external constraints on their pricing power, though not of the traditional form.

And banks and broker-dealers can be expected to provide only limited liquidity to their clients if a large number of them suddenly seek to realign their financial positioning at the same time.

But this is not just about them.

The fact is that providers of all long-term financial products, particularly life insurance and pensions, have no choice these days but to streamline their offerings, including a reduction of those that still provide longer-term guarantees to clients looking for greater financial security. The impact on the financial-services industry of these top-down factors will gradually amplify the importance of the bottom-up forces. Over time, this second set of factors will fuel more direct and efficient provision of services to a broader set of consumers, contributing to a reconfiguration of the industry as a whole.

For starters, customer expectations will evolve as the millennial generation increasingly accounts for a larger portion of earning, spending, borrowing, saving, and investing. Then there is the influence of outside disruptors.

2 forces transforming the financial services industry

These new entrants want to apply more advanced technological solutions and insights from behavioral science to an industry that is profitable but has tended to under-serve its clients.

Airbnb and Uber have demonstrated that disruption from another industry is particularly powerful, because it involves enabling efficiency-enhancing structural changes that draw on core competencies and strategies that the incumbent firms lack.

Many other companies for example, Rent the Runway, which provides short-term rentals of higher-end fashion are in the process of doing the same thing. Be it peer-to-peer platforms or crowd-funding, outside disruptors already are having an impact at the margin of finance, particularly in serving those who were previously marginalized by traditional firms or had lost trust in them.

  • The impact on the financial-services industry of these top-down factors will gradually amplify the importance of the bottom-up forces;
  • This article is published in collaboration with Project Syndicate;
  • Publication does not imply endorsement of views by the World Economic Forum.

The end result will be an industry that serves people via a larger menu of customizable solutions. As a result, a proliferation of financial providers is likely, with particularly bright prospects for institutional partnerships that combine the more agile existing platforms with exciting new content and approaches.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum.