World Economic Forum report: large technology firms like Facebook, Amazon and Google are a bigger threat to banks than fintech startups

Banks no longer define customer expectations of the banking experience; instead, fintechs and large technology companies set the standard says the World Economic Forum, in a report which dissects the evolving landscape for financial services. „Platforms that offer the ability to engage with different financial institutions from a single channel will become the dominant model for the delivery of financial services.”

For years Fintech has been the hottest topic of discussion in financial services, with incumbents, regulators, and consumers all asking the same question: “Will small technology-enabled ‘fintech’ start-ups redefine the way that banks and insurers operate, and upend the competitive landscape of the industry?”

Building on the findings of the 2015 World Economic Forum report “The Future of Financial Services,” the 2017 report considers the evolution and impact of fintech firms on financial services to date and presents a series of contrasting outlooks for the future of the industry.

„Our findings suggest that fintechs have materially changed the basis of competition in financial services, but have not yet materially changed the competitive landscape. They play a critical role in defining the pace and direction of innovation across the sector but have struggled to overcome the scale advantages of large financial institutions.”, according to Worl Economic Forum.

Fintech start-ups have fallen short of their ambitions to upend the competitive landscape in finance, driving innovation but failing to capture large market share and increasingly reliant on partnerships with banks to achieve scale.

“The partnership between banks and large tech companies risks not staying a reciprocal one,” says 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.”

The report highlights cloud computing, customer-facing artificial intelligence and Big Data customer analytics as three capabilities that are becoming critical to the competitive differentiation of financial institutions. All three are domains where technology giants like Amazon, Google and Facebook have far deeper experience than their financial services counterparts and where scale effects will make it difficult for financial institutions to catch up. As a result, many banks and insurers are turning to technology firms to provide these core functions.

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; maximising their strengths like rich datasets and strong brands, while taking advantage of incumbent institutions’ dependence on them,” says McWaters.

The findings suggest a move away from a focus on the potential competitive threat of high-tech financial services start-ups. While niche fintech firms have deeply influenced the direction of innovation in the industry, there are growing doubts about their ability to directly challenge incumbent financial institutions.

“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.”, says Rob Galaski, partner, Americas FSI regional leader, Deloitte Canada, and co-author of the report.

Other key findings of the report include:

. Banks no longer define customer expectations of the banking experience; instead, fintechs and large technology companies set the standard.
. Platforms Rising: Platforms that offer the ability to engage with different financial institutions from a single channel will become the dominant model for the delivery of financial services.
. Financial Regionalization: Differing regulatory priorities, technological capabilities, and customer needs are challenging the narrative of increasing financial globalization and making way for regional models of financial services suited to local conditions.
. Systemically Important Techs: Efforts by incumbent financial institutions to emulate the core capabilities of large technology firms will lead to an increasing reliance on those same large technology firms.

Another of the study’s findings notes the emergence of distinct financial systems in China, Europe and the United States, raising concerns for international regulatory coordination. The report observed that, in China, large technology companies like Ant Financial and Tencent have emerged as leading providers of a range of financial services – a striking departure from the traditional bank-led model dominant in the United States. Meanwhile in Europe, the forthcoming enactment of the Second Payment Services Directive is expected to open up banks’ customer data, creating an environment of more active competition between incumbents and new entrants.

“Technology is not driving a global convergence in customer experience, instead divergent customer demand and regulatory priorities are creating distinctly regionalised financial ecosystems” believes Bob Contri, principal, Deloitte Consulting, 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”.

This report represents the culmination of three years of research into the transformation of financial services prepared by the World Economic Forum in collaboration with Deloitte.

Previous publications in this vein include “The Future of Financial Services”, “The Future of Financial Infrastructure”, and “A Blueprint for Digital Identity”.

For more details download: Beyond_Fintech – A Pragmatic Assessment of Disruptive Potential in Financial Services