Decoupling of Product creation from Sales: Modularization in the Financial Services Industry

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26 December 2014
Eiichiro Yanagawa

There is no need to quote Darwin on evolutionary theory: only those that adapt will survive. Responsiveness to change — not the ability to avoid it — should foster an ability to leverage change. In this post, as a strategic implication for financial institutionsand technology vendors, we discuss the modularization in the financial services industry.

For some time, Celent has advocated that players in the financial services industry seek the full use and application of technology such as modularization, decoupling, and packages, and use these deftly in business functions, business processes, loosely coupled IT systems, standardization of procedures and interfaces, and international division of labor via horizontal deployment. In terms of financial instruments, investment trusts and life insurance products are the areas in which the decoupling of product creation and sales has advanced the most. These are also two major products sold via the banking channel.

The case of investment trusts
In the case of investment trusts, the process comprises two parts: the selection of the investment target (portfolio establishment) and the sales of the investment trust. The first of these involves the design or building (creation) of the product (portfolio); the latter refers to the sales of the investment trust security (shares and investment trust beneficiary certificates). Sellers of the product handle related paperwork, such as generating and processing customer transaction reports.

Until the 1960s, during the closed model era of securities firms and asset management firms, the norm was for asset management companies to entrust sales to external securities firms (full service brokers). A closed relationship with an established fixed commission structure (investment trust commission fee [paid by the customer to the securities firm] and a securities transaction fee [paid from the asset management firm to the securities firm]) existed for a prolonged period of time under which asset management companies and brokers entrusted transactions to each other to their mutual benefit. Subsequently, advances in the diversification in sales models were made.

In the 1970s, direct sales no-load funds emerged. There were a number of factors underpinning this: the liberalization of securities trading commissions, sluggish demand in the securities market, and the emergence of no-frills discount brokers that offered investors no advice. However, this entailed only a diversification of sales; no advancement in diversification of product design, creation, and sales emerged as a closed-model system remained in place.

Ultimately, innovation occurred in the form of what was tantamount to an investment trust supermarket. In 1992, the broker Charles Schwab launched its Schwab One source (product). Under this customers could purchase from a list of several investment trusts without paying any fees; the flip side was that Schwab collected an annual management fee based on the asset balance entrusted by investment trust firms. This was a system under which the investment trusts were put on display — like items on shelves in a supermarket — to be selected by customers, and “stores” paid a commission solely on items sold — , that is to say, the amount transacted. This opened up the interface between asset management companies and securities firms, spurring the modularization — or separation — of product creation and product sales.

The case of life insurance products
The case of Japan’s life insurers differs slightly. For a protracted period of time, the wellspring of their competitiveness was their own sales capacity, which might make the transformation seen in the investment trust business model described above a bit of a rough fit. However, against the background of decoupling of product creation from sales seen in the West, there have been cases of global firms with a long history in Japan genuinely transitioning assembler-type models (business model seen in manufacturing industry which builds up a module that parts makers offer on the premise of open architecture and provides completed products). These companies accomplish this through the integration of the operations of subsidiaries by sector (life, nonlife), finding a balance between indirect agent sales and direct online sales, and sharing back office functions (shared service). In tandem with this, there should also be an increase in insurers that are proactively seeking to supply components (financial products dedicated for these assemblers).

  • Bank Sales Channels
    Insurers will continue to have high expectations for bank sales channels. Insurer premium growth is largely dependent upon growth in the sale of savings-related products such as payment in lump sum whole life insurance. This is particularly important when it comes to the life insurance business.
    At the same time, viewed from the perspective of banks, off-balance sheet bank sales of insurance products by cross-selling is attractive as a new fee-generating business.
    For insurers, the bank sales channel can be regarded as a new business under which insurers develop partnerships with banks on a nearly equal footing. Insurance carriers develop the insurance products and operate the company while agents or producers (firms selling insurance) sell the products. Moving ahead, new partnerships are expected to arise based upon the increasing diversity of sales channels.
  • Brick-and-mortar shops
    Brick-and-mortar shops are increasing rapidly as a new business format for insurance agents.
    In particular, growth has been very visible in recent years as the number of such shops surged from around 200 in 2009 to approach 1,000 shops in 2013 for a compound annual growth rate of over 30%. With these shops frequently located in large facilities with high volumes of customer traffic and in busy roadside areas, the operators of these shops are competing for customers with other retailers and financial institutions such as banks.
    Insurance aggregators conduct contracts for multiple insurers, embodying an approach that strays from the conventional approach of working from selling a set menu of products; instead, they stress “life plans” and focus on demand from customers switching from other plans, offering one-stop shopping for both life insurance and nonlife insurance. In short, these companies have changed sales from the conventional process of offering what is akin to off-the-shelf insurance products, shifting to a neutral, consulting-based sales approach that proposes the optimal “coverage” services or offerings from various insurers.
    Currently, three types of insurance aggregators— shops that conclude sales contracts for insurers and handle the products of multiple insurers— exist in Japan. Today insurance aggregators account for approximately 5% of insurance sales, but Celent sees the share held by the insurance aggregator segment— (including bank channels and an array of sales channels— ) increasing and forecasts growth to the tune of 30% CAGR over the next three years.

In the insurance industry of Japan, for the trends and initiatives of modularization of the financial services industry, we recommend the Celent report below.


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