The Modular Future
Digital platforms are radically altering the industry’s value chain
Modular: It’s one of those words that suggests a lot even when it doesn’t say much. Officially, it’s an approach that breaks particular disciplines into specific ‘modules’ that can be used in different formulations, but when applied to fields such as interior design, it instantly evokes images that are linear, contemporary and cool. From a business point of view, because it enables great customization, it’s economical, adaptable and dynamic.
All of which gets us to modular financial services. It’s a market potentially worth $1 trillion, and it’s up for grabs.
That’s the provocative thesis laid out in “Modular Financial Services: The New Shape of The Industry,” a new report from consulting conglomerate Oliver Wyman. At its core is a singular premise that deserves consideration: “No supplier ‘owns the customer’ and each performs only a small part of the total transaction. This represents a transformation from what we have now, a mix of integrated one-stop shops, to different providers competing for different services along the supply chain.
Of course, it’s all driven by technology. First, the increased data sharing, however regulated, between different constituencies—everyone from individual accountants to credit bureaus and life insurers—is driving price transparency and greater competition. On a related note, the plethora of digital platforms steering demand to new players and established alike has quietly revolutionized many existing processes. Regulation plays a role too: Stricter compliance mandates are squeezing some lines of business for larger companies, enabling smaller funds and lenders to move in.
It’s important to remember that the entire process is dynamic: There may (and probably will) be more regulations coming, particularly with regard to data. The constant emergence of new devices and channels means that some practices (and the rules guiding them) are essentially obsolete before they ever take hold. Each change in turn alters the relationship between the different point son the value chain.
But for now, here’s how it looks. That’s how we reach the bottom line. Building on the premise that the industry currently generates $5.7 trillion a year, Oliver Wyman the pegs the figure attributable to the modular segment at $1 trillion. That’s a very big pie, and even a small added slice could be very satisfying.
To be fair, it’s not as if we haven’t seen these changes taking place. Every individual in every corner of banking is aware of how the spread of digital technologies demolished established industries dependent on content, from music to travel reservations. We’ve recorded the hit on loyalty that comes from startups emerging, and we know the disruption caused by easy searches and price comparisons. We know how easy it is for technology-enabled upstarts to lure customers with convenience over trust and quality. Still, it’s very instructive to step back, as this study does, and consider the industry from a broader perspective, and see how the relationship between the sum and the parts continues to evolve.
So what comes next for industry players? What should different industry segments be doing to benefit from the modular structure, or at least not get left behind?
For larger corporations accustomed to owning just about the entire value chain in an integrated market structure, it may be time to go back to the drawing board to create a single, trusted platform that serves as the main point of contact for customers, even if those customers choose to avail of a different provider’s services. This is turn mandates bidding farewell to the legacy infrastructure that still resides in many conglomerates’ back rooms. It will cost billions, and it will bring is less business than before, but it’s vital.
For just about every other constituency, from regional banks to individual accountants, the landscape is wide open. The old rules of offering specific services to a particular set of customers at given points on the value chain continue to be thrown out. It’s a market of emerging and endless opportunities.
This only a small sampling of the conclusions presented in this study—and there are others like it—but all of them point to an inescapable truth: Modular services offer massive benefits to every customer, even as they compress margins for particular providers. For example, it’s estimated that lower prices will cut up to $300 billion in value, while new models generate up to $200 billion in new revenue. Companies able to make those numbers work will be the real winners.
It’s understandable why some might see this as rebranding more than the growth of new markets. But the core assumption is undeniable: The emergence of digital technologies, with services tied to particular platforms rather than established brands, has drastically upended many operating practices, commoditized many services, and cleared the way for enhanced competition from tech-based startups. In that sense, it’s not just the financial services industry that’s now modular; the entire future is.