Research & Thoughts

Retail Financial Services New Market Entrants

New kids on the block … do new entrants have the X factor to succeed or will they simply fade away?

This white paper is intended to inform the current wave of new market entrants as they consider retail financial services, and to help them avoid making similar mistakes to previous entrants. The paper will consider how incumbents are likely to respond to the new wave of entrants and just what success will look like, both for new entrants and incumbents.

Recent economic turbulence has disrupted markets. Governments and electorates have joined in the criticism that traditional financial services providers have received. The result is the expectation of “a fresh approach”. In response, we have seen the launch of a number of new players, including Metro Bank in the UK, and Fidor in Germany, among others. There are also entrants and ambitious growth projected from beyond the industry “pure play”. Among those announcing plans to expand their retail financial services offering is Tesco, via Tesco Bank, in the UK. Yet the fact remains that the market is mature, not to say crowded. Even the more recent engines of growth, e.g. consumer credit, are now at maturity.

Appetite for change is not always followed by action
Market maturity is compounded by the fact that customers can be “sticky”, i.e. reluctant to change service provider. Whether because of loyalty or inertia, encouraging migration to new providers can prove difficult.

So what makes a winning entrant?
Yet in spite of the obstacles, there continues to be growing interest from new entrants. To gain an insight into the rigors of new market entry, we have reviewed the past performance of some 30 new entrants (across Banking, Insurance, Wealth and Payments). Our timescale covers the last twenty The analysis points to a number of key factors that characterize the winners; i.e. those who have succeeded against original expectations. These factors include parent brand strength and / or strong customer affinity with the provider; innovative propositions; technology innovation; and sustained strategic focus from parent organizations.

What are the key questions prior to market entry?
As a result of our analysis, we conclude that new entrants wishing to improve their likelihood of success should approach the market in a structured fashion. To do so, they need to address the following key questions:

  • Which markets are the most attractive to enter, in terms of geography, customer segments and products?
  • Which is the most viable mode of market entry? Should prospective entrants look to buy an incumbent or one of the businesses that are currently being divested, attempt to partner with an existing player, simply search for an affinityrelationship, or build an entire greenfield operation? (Note: in many cases their decision will of course be influenced by regulatory requirements.)
  • What product (s) will they offer and how will they differentiate their offer from the competition? Will differentiation center on price, customer service, or exploiting a new technology development?
  • How will they distribute, remotely or via face-toface channels?
  • What will their operating model look like and where will their core competencies lie? Based on these characteristics, should they manufacture and distribute themselves and what should they look to outsource?
  • Do they want to go it alone, or to partner? If partnership is an option, with whom should they partner from a product, manufacturing and technology perspective?
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