Financial institutions’ drive to become more “experience-driven” is opening the door to potential competition from global technology giants, according to a report published by the World Economic Forum.
According to the report, Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services, the challenge to banks and insurers is down to large technology firms hollowing out the value proposition of these institutions by carrying out more core functions, even as banks and insurers lean ever more heavily on them to compete.
Another finding of the report, which aims to examine the impact of innovation on the financial ecosystem, is that fintech start-ups, while achieving success in terms of changing the basis for competition, have had less impact than expected in disrupting the competitive landscape.
“The partnership between banks and large tech companies risks not staying a reciprocal one,” said Jesse McWaters, lead author of the study, and Project Lead, Disruptive Innovation in Financial Services at the World Economic Forum. “Financial institutions increasingly rely on technology firms for their most strategically sensitive capabilities, but can so far only offer their ongoing business in return.”
Examples include:
Amazon Web Services (AWS), which provides services to dozens of finance companies, including Aon, Capital One, Carlyle, Nasdaq, Pacific Life and Stripe
Brazil’s Banco Bradesco Facebook app, which allows customers to conduct day-to-day banking from Facebook, relying on the social network’s customer data analytics to target users
Capital One and Liberty Mutual’s “Alexa” solution (a voice-activated personal assistant), which allows customers to check balances, pay bills and track spending through these devices
While these partnerships can accelerate innovation, the report points out that they also pose a risk should large technology players choose to enter financial services in direct competition with retail banks and insurers.
“Tech giants would be able to pick and choose their points of entry into financial services; maximizing their strengths like rich datasets and strong brands, while taking advantage of incumbent institutions’ dependence on them,” said McWaters. As a result, financial institutions will likely need to walk a challenging line between capitalizing on the services of large technology players and becoming dependent on them.
For customers, the entry of large technology firms into financial services could mean entrusting both their financial and non-financial data to the same company. For policy-makers it would raise serious questions about how best to avoid both anticompetitive behaviour and the inappropriate use of personal data in decision-making.
The findings suggest a move away from a focus on the potential competitive threat of high-tech financial services start-ups, typically called “fintechs”. Much research, including the World Economic Forum’s 2015 report on The Future of Financial Services, suggested that “niche” fintechs could stage a broader disruption of the financial system. But, while they have deeply influenced the direction of innovation in the industry, there are growing doubts about their ability to directly challenge incumbent financial institutions.
“Fintechs have changed the basis of competition in financial services, but not the competitive landscape” said Rob Galaski, Partner, Americas FSI Regional Leader, Deloitte Canada, and co-author of the report. “Fintechs now define the tempo and direction of innovation in financial services, but high customer switching costs and the rapid response of incumbents has challenged their ability to scale”.
“The ability to be a fast follower has proven more important than being first for large financial institutions,” said Galaski. “Agile incumbents have used the fintech ecosystem as a supermarket for capabilities, making the ability to nurture and rapidly form partnerships a critical ingredient to banks’ competitive success.”
“Technology is not driving a global convergence in customer experience, instead divergent customer demand and regulatory priorities are creating distinctly regionalized financial ecosystems” said Bob Contri, Principal, Deloitte Consulting LLP (US); Deloitte Global Financial Services Industry Leader, and an adviser to the report. “This could pose a serious challenge to regulatory coordination, as regulators struggle to understand the disparate impact of global regulations on each region”.
