What are the success factors for new entrants to the superannuation market?
A recent report by McKinsey on lessons learnt from new businesses in digital banking on an international perspective give some guidance that may be applicable.
While disrupting banking is different from disrupting Australian superannuation, there are some tenets that may hold true.
The base recommendation in the McKinsey report is to only pursue entry into the market where three important conditions are met. Firstly that the opportunity is large, secondly that speed to market is critical in capturing value and finally that a unique set of capabilities suited to digital operating model are present and focused within the entity.
On face value it would seem that there is scope for all three of the above criteria to be able to be satisfied for new entrants into the superannuation industry, with some caveats.
Firstly, the opportunity for new entrants is large, particularly in terms of assets under management and number of members. However, due to challenges in generating a margin in a market dominated by large not-for-profit participants and an environment where fee excesses are increasingly under the spotlight growth may not easily translate in profit.
Secondly the ability to bring an innovative product to market with both speed and innovative digital engagement does spark interest. And thirdly, current new offerings have shown there is scope for a departure from the existing operating models of large administration system backed offerings.
Assuming there is scope for the base criteria for entry to be satisfied, the next question is what elements will determine success? What are the qualities that will align with greater probability for success for new entrants? The McKinsey report suggests a range of markets for success. A select group of these markers appear applicable to new superannuation offerings.
Integrated digital ecosystems:
Established and larger superannuation fund have a starting advantage in terms of data depth and member analytics. However the progress of open data and interaction between financial services accounts data give the opportunity for newer superannuation products to leap this.
No conflict with parent entity's strategy:
With banks retreat from the wealth space, this restraint is receding. However it is not surprising that the new superannuation offerings have not come from within the established retail superannuation providers, but from new players who are not encumbered by conflicts in distribution.
Delighting customers in solving existing pain points:
The trustee and vested nature of superannuation has the potential to generate pain points for individual members. This is even more acute for younger members who are far away from the benefit period. These pain points can include the value and appropriateness of insurance, the ability to direct investment allocation to aligned values, and financial terminology. While newer entrants cannot easily change the paternalistic fundamentals embedded in the trustee structure, they can offer variations and niche offerings to alleviate other pain points.
A plan to introduce and cross selling income generating products:
One undeniable goal for new entrants is to establish a business of financial value. The potential to translate growth in assets and members into profit is somewhat challenged by the increased focus and transparency on fees, along with the dominance of not-for-profit funds in the market.
Therefore additional lines of revenue or margin will need to be developed. This can already be seen amongst newer superannuation product providers branching out into associated non-super investment offerings.
There are clearly a number of hurdles for new entrants challenging the incumbents and establishing a foothold in the superannuation industry.
And once established there is the ongoing requirement of investment in both infrastructure and targeted marketing beyond the initial years to grow beyond a micro-niche player. But all existing funds started from ground up at some stage, and those that leap the hurdles will have battle hardened capabilities for success.