Research study: How financial services firms will make money in the future

The financial services industry can’t continue to make money the way it used to. So the IBM Institute for Business Value tackled the challenge of answering the following questions:
*  Which forces are disrupting the industry? 
*  What will clients be willing to pay for?
*  How will the basis for competition change? 
*  And what steps should financial services firms take to prosper over the next three years?

Recommendations for a “new financial order”

You can read the researchers’ answers in “Toward transparency and sustainability: Building a new financial order.” As I see it, their answers boil down to a need for financial services firms to

1. Work with regulators to develop a system that hits the right balance between protecting investors and fostering financial creativity

2. Deliver on their promises to clients, including their promise “to focus on the interests of their clients”

3. Become more specialized, with a division between “beta transactors” and “alpha seekers”

On #1, the need for the right regulation, the executives surveyed by IBM anticipate “greater transparency and higher capital requirements,”IBM’s analysis suggests seven elements for an appropriate solution (see p. 7).

As for #2 “… firms will need to become more cost-effective, manage risk more competently and move closer to their clients,” says the report (p. 9). 

The specialization called for in #3 may result from unbundling. Although the industry executives surveyed by IBM favor the universal banking model,”the vast majority (89 percent) anticipate that overcapacity will ultimately result in some sort of unbundling” (p. 12).

Provocative ideas

“Most providers do not even realize what their clients actually want,” says the report. So they’ll struggle to meet their clients’ needs.

Managing risk will require cutting costs because “the amount of risk [financial institutions] can underwrite relative to the capital they employ will be much lower…. Slashing headcount and closing business lines–the levers traditionally employed when the industry wants to save money–will not be enough” (p. 9). Companies must slash 20% beyond the savings they realize from divestitures and eliminating redundancies, according to IBM’s analysis. It sounds as if firms have a lot more cutting to do.