A March 13th report from Goldman Sachs Equity Research titled The Future of Finance: The Socialization of Finance focuses on the ongoing evolution of the banking industry and financial markets. Authors Heath P. Terry and colleagues note that: “Technology and an increasingly social consumer are democratizing access to funds and services beyond the walls of financial institutions. With millennials as important agents of change, new business models for crowdfunding, peer-to-peer lending, socialized payments, and automated investing are rising to take market share from existing banking channels.”

Social Consumer financial markets

Technology is driving fundamental changes to financial markets

Social networks, Big Data, mobile accessibility and new funding and marketing models are creating a bevy of financial services firms that can offer useful new services to consumers at lower costs. The GS analysts point out that these technologies are still in their infancy, but will develop in the near future as access to data grows, computing power increases, and access speeds hit new records.

Social consumers demanding more from the financial industry

Consumers today demand greater transparency, ease of use, 24/7 access and automation. Millennials are driving change, but all generations are demanding greater transparency, convenience (and returns), forcing the banking industry to adapt. Terry et al. note that this process is also still unfolding, and anticipate that today’s new features and services will soon become become part of the basic minimum that consumers expect.

Trillions at stake

Social Consumer financial markets

The Goldman Sachs report argues that there is more than $4.7 trillion of revenue from financial services industry “at risk for disruption by the new, technology-enabled, entrants.” Extending the argument, the analysts point out a 10% profit margin means $470 billion of profits at risk. New online competitors in ecommerce and travel have secured anywhere from 10-30% share of the existing market. Assuming the new business model firms reach a 20% share of the financial services TAM,  that suggests a $660 billion potential revenue loss.

Social Consumer financial markets

Terry and colleagues discuss four potentially disruptive trends. First, crowdfunding growing into another channel for small business and product financing. Second, wealth management becoming self-service auto and more “technology-enabled to appeal to the next generation of personal investors.” Third, expect major changes in the payments sector as 63% of millennials don’t have a credit card.  Fourth, lending marketplaces improving due to competition for lower-cost models.