Is the financial services industry at an inflection point? According to new research, the next five years will see a fundamental shift in the way financial institutions create and deliver consumer products and services.
With the economy shifting away from owning and buying to renting and using, researchers from Ernst & Young predict that consumer finance will become the next subscription model, via personalized and holistic value propositions based on life events.
In “NextWave Consumer Financial Services,” authors Nikhil Lele and Yang Shim, both principals and digital thought leaders in Ernst & Young’s Financial Services Advisory practice, explain that the financial services industry is one of the few yet to be disrupted by the “subscription revolution,” but consumer preferences and behaviors are helping to drive this change.
Consumer Demand
According to EY’s study, which is based partially on a survey of 1,500 U.S. consumers split across wealth, age and other demographic factors, the 25-34 (52%) and 35-49 (51%) age groups expressed the highest interest in subscription models, followed closely by the 18-24 age group (44%).
The authors suggest that these types of models are attractive because they help consumers access the services and guidance they need, which is particularly important relative to key life events with major financial implications. They note that several life events prompt high interest in subscription-based models including getting married (96%), having a child (90%), starting a first job (83%) and preparing to send a child to college (83%).
“Our NextWave research shows that consumers across all segments want to engage, and are willing to pay for subscriptions, value bundles and benefits, including price certainty and convenient access to services,” notes Lele.
In fact, Charles Schwab in March announced that it is moving to a new subscription pricing model for Schwab Intelligent Advisory to simplify its approach to comprehensive professional guidance and financial planning for the firm’s digital advisory services.
Lele submits that both financial institutions and technology firms will begin offering more holistic life-event based subscription bundles that will include products, advice and dynamic financial health insights bundled together as a service. “Ultimately, this will lead to the separation of services from products. In fact, the service itself will become the product,” he says.
Personal ‘Financial Operating System’
Drawing on these changing consumer preferences, EY further predicts that the catalyst will be the concept of a consumer’s “personal financial operating system.”
This would be an AI-driven financial health platform that would be a “dynamic, trusted and embedded” digital experience that helps consumers improve their financial lives through ongoing and relevant interaction and engagement, the authors note. “The boldest firms will seek to drive alpha growth and competitive differentiation by serving as consumers’ ‘personal financial operating system’ with integrated tools, proactive advice and intuitive experiences designed to promote financial well-being and security,” they state.
As to where consumers would turn for these services, customers of financial institutions would rather get their subscriptions from their financial institution than from a technology firm, the report notes. But because large technology firms can enter the competitive landscape and capture material market share, the authors recommend that financial institutions act now with “bold purpose and clear focus.”
Subscriptions pose both an opportunity for financial institutions and a threat if they do not move proactively, they emphasize. “The opportunity is clear: consumers will value subscription-based services and would be willing to pay if offered the right value bundle. The shift toward monetizing users and experiences versus monetizing products and transactions represents an evolution for the commercial models of most institutions.”
