“Alexa it”, just as you “google” it. We recently read that Amazon wants us to “Alexa” things, in a bid for world domination of the voice-assistantindustry and to steal for Google a little piece (more) of the search market.
But Amazon isn’t new to these tactical maneuvers to achieve supremacy. It has slowly but very firmly eroded the retail market and transformed how we buy things online. The Seattle-based retail giant, with its AI-powered and intuitive personalised interface has become the quintessential reference of the platform economy.
By platforms, we umean computer systems that allow for exchanges, commonly transaction-based between users, businesses, entrepreneurs, etc. They follow UX criteria, are accessible via multiple devices and most of us acknowledge how convenient they are—sometimes at first, begrudgingly— but soon after, addictively.
There isn’t a force field strong enough to stop the increasing demand for digital experiences that look (and act) like Amazon, not even in the sometimes corseted B2B arena. Financial services are bound to snuggle up to the platform economy, according to recent research we conducted together with Luxembourg for Finance.
All of the four main sectors that will dominate the European Financial Services landscape up to 2025 want to consider, one way or another, Amazonisation as a viable strategy to remain competitive. Asset and Wealth Management, Banking and Capital Markets, Payments and Insurance, are subject to the same influencing factors. Client centricity is a growing standard, sustainability criteria are becoming preponderant, regulation is tightening so as to infuse stability and trust in the system, and technology —enhanced by big data and AI—is constantly evolving.
Platform-driven financial services use digital platforms to inform, compare and execute financial transactions and this applies to both retail and commercial clients. Such platforms will seek to become a marketplace by aggregating as many financial services products as possible, including third party products and their own.
Conscious of the fact that Amazon, and other influential “big tech”, are currently under scrutiny for ethics breaking of certain business practices and policies, forces us to clarify why we chose the term “amazonisation”. Why don’t we name this phenomenon “Facebookisation” or “Expediasation” of European financial services? We purposely selected Amazon due to its unique connection to the platform-operating model.
Amazonisation translates into financial services primarily using digital platforms to serve clients and engage with them. They are both, client-facing interfaces to manage products, and a distribution method to search and buy them. In addition, platforms are a means to exchange comments and reviews that let buyers assess future investments based on others’ prior experiences. Indeed, pre-defined KPIs will likely rank products and services, positioning on top the ones providing the best value for money.
The rise of AI will further accelerate this process, with AI technology not only building, but also updating, individual client profiles based on preferences and interactions. Upselling and cross-selling will get a boost. Suggesting products will fall in line with a client’s specific profile.
Similar to when we visit Amazon’s online shop, these platforms will allow for comparability and, therefore, increase transparency. However, they will also force providers to be at the forefront of innovation and new technology implementation.
Amazon-like… but also eBay-like?
Platforms’ product offering can adopt different approaches. In some cases, the platform could be run by a “non-bank”, aggregating third party products, similar to what ebay does, facilitating the trade of financial products between clients and providers.
In other cases, financial services institutions become direct providers of products, an approach that is closer to the Amazon’s one. In this case, the platform could offer the institutions’ own products or a combination of both, owned and third-party products which will likely adopt a bundling strategy.
Financial services providers, or third parties who offer the best products and best value, will be able to rise to the top, promoting product innovation.
In this reality, current technology players such as Google, Apple and Amazon will have the opportunity to offer financial services products. In fact, Apple already launched Apple Card in August 2019, a credit card developed by Goldman Sachs. This card, following the Cupertino’s company well-known preference for simplicity and transparency, offers users the possibility to pay for product or services via Apple Pay or on Apple devices, seamlessly.
Characteristics of a financial services platform
Data-powered
Financial services will have a lighter physical footprint thanks to technology developments therefore their online presence will increase significantly. Their success will lie in their ability to capture the mass of data available to them (while remaining compliant with data privacy regulation), organise and analyse them to improve personalisation (data mining) and bring about new product offerings in response to client demands.
Client-centric
With both a top-class online experience and timely customer service, Amazon has set the standard for what users expect from online platforms. In fact, ease and intuitiveness have been central to the retail giant’s success, and they will be pivotal for the financial services that want to lead the platform economy as well.
Millennial-driven
Arguably, millennials’ shifting attitudes towards “digital everything” are already driving the transition to the platform economy in several industries like lodging (Airbnb), transportation (Uber and Lyft), search and online services (Baidu), cloud computing (Salesforce) to mention some.
Millennials are, like it or not, “amazonised”. Forbes estimates that roughly 40% of 30-something Millennials and Gen-Xers would open a fee-based Amazon checking account bundled with services like cell phone damage protection and ID theft protection for a $5 to $10 monthly fee.
It seems inevitable that accessing services via online platforms will simply be the norm for Generation Z.
Financial services don’t want to leave both millennials’ and Generation Z’s preferences unattended. This becomes all the more apparent as the workforce shifts towards them, and they become financial services’ dominant clients.
Interactive and social
Because younger people are, perhaps, more hesitant to trust corporations, financial services platforms need to add features that make their product offer more transparent to build and maintain confidence over time. Social networks, an almost inevitable component of our lives have the answer to that. “Like” buttons, comment sections, voting systems, sharing options, endorsement features; some of them will be adopted and adapted to financial services platforms.
Bundled
Platforms will allow providers to offer bundled products-—or, simply put, “packages”— to clients. This requires, however, sound information on user behavior, market competitive analysis and a canny approach to what products to bundle and how, based on how similar or different they are.
To clients, bundled services are synonymous with direct cost savings and convenience. On the other hand, financial providers can benefit from efficiency gains, better market positioning and customer loyalty.
Amazonisation per industry
Looking to the future, the report “Amazonisation is the Future of European Financial Services” states that four main sectors will be crucial for the development of the sector up to 2025, namely Banking and Capital Markets, Asset and Wealth Management, Payments, and Insurance.
Banking and capital markets
European banks need to reimagine themselves and clean up the traditional, —scruffy, we-are-laggards image they hold until now.
This calls for weighing both technology and regulations to determine where to gain cost efficiencies, while still providing excellent client service. Banks by definition have the data, scale and brand to make the move towards digital. Embracing Amazonisation is one suitable way to move forward and catch up with the times.
Undeniably, European banks have a profitability issue. For instance, the top five European banks had net profits of only US$17.5 billion in 2017, below JPMorgan’s profit of US$24.4 billion, while the same top 5 banks have the highest average- cost income ratio of the three regions (see Image page 21). There is a need to urgently look for other horizons.
By embracing the platform economy, banks become aggregators of not only their own, but others’, innovative products, as well as one-stop shops for clients’ banking needs.
Asset and Wealth Management
Many asset and wealth managers need to reassess their operating strategies because compliance costs are rising, management fees are set to drop and margins, consequently, are under pressure. In fact, Europe is expected to see the slowest asset growth in percentage terms and the highest fall in fees for both passives and actives up to 2025. While fee transparency brought about by MiFID II can explain much of this, changing client preferences —i.e. the shift to best value for money products—will also be a significant driver.
In addition, regulators are calling for asset and wealth management institutions to adhere to their fiduciary duty while remaining compliant.
How to provide the best value for money to investors, adapt to new, pressing realities, and support the challenges facing the European economy?
The future of how retail funds will be bought is, in our view, via platforms. Either clients will buy funds through standalone platforms or through independent financial advisors, who will use B2B platforms to purchase funds on behalf of their clients. This trend will drive assets to the best-in-class product providers, offering real value for money and making them successful.
With the coming rise of fund platforms, funds will soon be comparable through pre-defined KPIs, independent assessment agencies (e.g. Morningstar) and comments of clients who bought the product. With this extended transparency, there will be pressure on fund managers to provide products that are most relevant and fair to the needs of investors.
On the other hand, with the growing trend of ICOs and crowdfunding, the tokenisation of the AWM industry is likely to happen. In this future, investors would be able to buy tokens that represent a fractional share of a given project, such as the building of a new road.
Payments
Rapid technological advancement, a new consumer generation and a regulatory environment that encourages innovation are shaping the cashless society.
Europe will lead this move in advanced economies. A favorable regulatory framework, the creation of real time payments infrastructure and European Central Bank’s efforts to strengthen the Eurosystem’s market infrastructure for payment and settlement services are pivotal to this positioning.
The rise of e-commerce and mobile payments is accelerating, having convenience and millennials as allies. Global mobile POS payments transaction value is anticipated to reach approximately US$2.14 trillion in 2023, growing at a CAGR of 32% from 2018.
Amazonisation will hit payments mainly at the point of sale (POS). Consumers will have the possibility to choose from a variety of payment service providers (PSPs). Telecommunications companies, social networks, global card networks and online retailers will join banks and fintechs in this competitive segment.
On the money-transfer side, challenger banks and FinTechs will take advantage of the inefficiencies of current cross-border money transfer fees and processes to disrupt this area, a fief of traditional banks.
Insurance
Similar to banks, European insurers need reinvention. Flirting with a user experience mindset, data analytics, bundling strategies, etc, can turn them into a one-stop shop for clients. Platforms have a role to play in this reinvention.
For instance, they can provide access to a marketplace where clients compare and evaluate insurance offerings from multiple providers. If technology players decide to enter this space, they will become serious challengers of incumbent insurers.
The use of new technologies will help insurers to take advantage of new risks to develop products that potentially become new revenue sources. Telematics and the sharing economy are already impacting the sector, boosting the need for insurance companies to offer new products such as pay-as-you-go insurance.
Given that European insurers will seek out ways to integrate new technology into their operations, we expect many traditional insurers to acquire or collaborate with Insurtech companies.
You decided to invest your pension in a portfolio that includes financing health infrastructure in African countries.
While drinking a cup of black coffee at a quiet corner of your favorite coffee shop, you open your bank’s app and choose the investments tab.
You browse the options. After comparing, you shortlist potential investment opportunities and click on the tab called “what clients say”.
And that’s the platform economy.
What we think
John Parkhouse, CEO at PwC
It’s crucial that Europe grabs hold of the opportunities within its grasp, from those stemming from technology and the rise of new generations, to the growth of continental European financial services stemming from Brexit. We are keeping a firm eye on the horizon, taking the best from new developments and opportunities, exchanging views from a number of experts situated throughout the region, and ultimately, positioning Europe as a leading financial services destination.
Nicolas Mackel, CEO at Luxembourg for Finance
These three trends of amazonisation, mainstreaming of sustainable finance and multi-polarisation will certainly test the industry beyond what we can predict today and we will witness many innovators struggling with the dilemma of changing their business model to adapt to the new circumstances. This capacity for adaptation is what will define success in the future…
