A new report tells the sector that it must disrupt itself to avoid being China’s breakfast, lunch and supper.

A new study from PwC and develpment agency Luxembourg For Finance warns of three trends that will dominate and disrupt European financial services over the next five years. First is the “Amazonisation” of the sector as power shifts to consumers using online platforms; second is sustainable finance becoming mainstream as Millennials take the investment wheel; and third is the polarisation felt by European financial centres in the wake of Brexit.

The report puts European banks, asset managers, payment providers and insurers on alert to get “beyond short-term financial targets” if they want to stay competitive and not lose further ground to Asian and US rivals, which has certainly been the case since the financial crisis, it said.

In stark warnings to Europe's financial sector, the global consultancy group used market data to demonstrate how fast momentum has already shifted. From virtually a standing start in 2007, China’s global share of tier-one capital has grown to around 53 per cent, the report noted. By contrast Europe has contracted from 73 per cent to less than 20 per cent today.

The Amazon effect
PwC said that European banks will need to take a leaf out of retail giant Amazon’s playbook by aggregating their own products alongside the best third-party service innovations and become a one-stop shop for clients.

Much like the way in which Amazon operates today, it suggested that new online platforms will dominate Europe’s financial services industry, where “retail and business customers will be able to search, buy and manage products that are bespoke and offer the best value for their specific needs." These platforms will also "offer a new level of transparency, comparability and convenience, which will directly affect the four main sectors of financial services.”

Next gen investment demands
Much has been made of the great wealth transfer to Millennials as they stand to inherit billions from wealthy boomers in the coming decades. Be prepared is the message as this new generation of investors will “favour managers with compelling and transparent ESG propositions, coupled with technology that is personalised and easy to use.” PwC estimates that global ESG fund assets will grow from $885 billion in 2017 to more than $1.7 trillion by 2025, and suggests that Europe will continue to lead in managing these assets.

The challengers
Already a major disrupting force, fintechs and challenger banks will further exploit payment opportunities in an increasingly cashless European society, while using “AI to take advantage of inefficiencies in cross-border money transfer.” PwC forecasts that the global mobile payments market will be worth $2.14 trillion by 2022 in a market in which Europe will stay dominant. Still, it sees Europe's share slipping from 22 per cent to 20 per cent in the next five years, with China’s share expected to reach 50 per cent in that time.

Insurance equally on the hook
Similarly, Europe’s life insurance sector has no place to hide. The consultancy firm believes that  Europe will again be in China's shadow, with premiums forecast to grow by just 2.7 per cent compounded to $706 billion in the next five years; while China’s growth is expected to reach $1.1 trillion, up by 13.4 per cent for the period, and overtaking the US market.

“The insurance sector must continue to improve the customer experience, offering more product and pricing transparency, and use their substantial data capture capabilities to provide people with on-demand usage-based insurance,” the report said.

Based on these disrupting forces, “we recommend firms disrupt themselves to become cost effective, nimble and competent,” said John Parkhouse, senior partner at PwC Luxembourg. He said prioritising efficient data use and new technology was key.

He also suggested deepening cross-border services and putting fresh efforts into innovation and digitalisation. He said that Europe could achieve this “by completing the EU’s banking and capital markets union as well as alignment at the national level."

Europe’s Brexit silver lining
While the report acknowledged that the City of London would be a loss to the EU in the short term, denting competitiveness with the likes of New York and Singapore, Brexit would harbour lasting positive benefits.

“Brexit is forcing Europe’s financial centres to hone their specialisations and to demonstrate how they complement each other,” said Nicolas Mackel, CEO of Luxembourg for Finance. “Companies in different sectors are deliberately choosing different locations to place part of their infrastructure and operations, based on a long list of factors, but driven by the existing financial ecosystem. In time, as London sees a gradual erosion of its prominence, this multi-polarisation effect will enable Europe to leverage the continent’s combined expertise to compete worldwide,” he said.