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Bigtechs, merchants and fintech companies now account for 35 percent of the total financial services industry value, shrinking the position of incumbent players and creating a new wider financial services market, says Oliver Wyman.
In its annual state of the financial services industry report, the consulting firm finds that nearly one-third of the world's top 50 financial institutions are now financial infrastructure, data and tech firms, both by number and market capitalisation, up from only two a decade ago.
This value shift is largely the result of the slowing growth of more capital-intensive risk intermediation services provided by incumbents, relative to the faster growth of more capital-light services linked to data and value technology services, the report says.
Although the top 20 incumbent firms have grown by about 70 percent over the last decade, bigtechs have increased their value by 405 percent during the same period.
Oliver Wyman also estimates that listed payments and technology firms grew by 480 percent, and private fintechs, including digital asset firms, increased their value by as much as 1,000 percent.
In actual numbers, it means that top incumbents in financial services have grown in value by $1.3trn over the last decade, while more than $3trn of new value has been delivered by bigtechs, merchants and financial infrastructure, data and tech firms.
How big can the fintech bubble grow?
The opening up of financial services to new types of players, technology advances and the accelerating growth of digital payments has provided outstanding opportunities for new market entrants to shake up the financial services industry.
Fintech firms have repeatedly made headlines with their rapidly rising valuations. After its $1bn series D funding round in January, Checkout.com became the most valuable UK start-up. Its $40bn valuation puts the firm alongside traditional market players such as Barclays, whose current market cap stands at $35bn.
Barclays, whose origins trace back to 1690, has a similar valuation to digital bank Revolut, which is valued at $33bn, while Klarna is valued at $30bn.
These figures are particularly startling if we consider the fact that many fintechs often generate much lower revenues and profits compared with incumbent providers, while some market players operate at losses. Klarna, for instance, reported SEK6.58bn ($665m) in operating losses in 2021, while Revolut registered $231m in losses in 2020.
The valuation of fintech firms, however, typically does not rely on their current performance but rather on the future potential they hold.
As a recent International Monetary Fund paper notes, despite the relatively modest balance sheet size of neobanks, “future growth is their main source of value”.
Changing market conditions or failure to meet expectations can have serious consequences, which is reflected in the recent plunge in the valuation of fintech and bigtech companies.
Klarna, for example, has seen a 30 percent decrease in its value compared with its $46bn valuation last June. On Monday (May 23), the firm announced that it was cutting 700 jobs claiming rampant inflation and the war in Ukraine have worsened business sentiment.
One of the most successful fintechs to emerge over the last decade has been Block/Square. The company has lost almost two-thirds of its valuation over the past nine months falling from $126bn to $44bn.
Bigtech, big threat
The Oliver Wyman report also highlights the increasing prominence of bigtechs' move into digital payments and embedded finance.
Even with the recent dip in their valuation, bigtechs created $9trn in new value, according to the report, and are increasingly moving into financial services through payments and increasingly expanding into other financial services.
The threat of bigtechs' move into financial services has become a prominent concern for the payments industry. A recent VIXIO survey of compliance leaders found that payment firms, particularly in the US, view emerging non-financial services payment players as one of the biggest challenges to their future growth prospects.
Oliver Wyman states that bigtechs, in the pursuit of new revenue sources, have a huge opportunity to grow in financial services.
In a more decentralised financial services industry structure, the report argues that these firms can address much of the new value potential in the industry without taking on the onerous capital and supervisory costs of risk intermediation
“There is a queue of smaller incumbents looking to partner with them and happy to take their terms,” while “gaining strategic scale is going to be vital” for fintech firms as well, Oliver Wyman says.
The consulting firm expects another wave of partnerships as bigtechs focus on further embedding their companies at the centre of the lives of the customer, and bringing commerce, advertising and other services to the customer through a greater accumulation of connected data and technology.
“Co-opetition with incumbents and [financial infrastructure, data and tech firms] alike, and the rise of the Metaverse look most likely to benefit bigtech,” the report notes.
