The emergence over the last decade of a vibrant financial technology (Fintech) sector has changed the basis of competition in financial services — but it hasn’t changed the actual competitive landscape in a material sense. At least not yet.

That’s the finding of a major World Economic Forum investigation which has been four years in the making.

The authors of the report, called “Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services”, warn incumbents that in a world where new Fintechs are driving innovation established players need to lose the complacency. “In geographies where incumbent service providers did not exist, and in segments where incumbents were not meeting customer segments’ needs, new entrants to financial services have been able to build significant scale.”

According to the study, “The technologies of the Fourth Industrial Revolution have triggered a seismic shift in the financial system, the implications of which will extend far beyond the Fintechs that pioneered their use in financial services. Value chains that have characterised the industry for decades are being disrupted and reshaped, with implications for customers, regulators, incumbents and every other stakeholder in the financial system.”

Among the key findings:

  • Cost Commoditisation Financial institutions will accelerate the commoditisation of their cost bases, removing them as points of competition and creating new grounds for differentiation;
  • Profit Redistribution Technology and new partnerships will enable organisations to bypass traditional value chains, thereby redistributing profit pools;
  • 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;
  • Systemically Important Techs Financial institutions increasingly resemble, and are dependent on, large tech firms to acquire critical infrastructure and differentiating technologies;
  • Experience Ownership Power will transfer to the owner of the customer interface — pure manufacturers must, therefore, become hyper‐scaled or hyper‐focused;
  • Bionic Workforce As the ability of machines to replicate the behaviours of humans continues to evolve, financial institutions will need to manage labour and capital as a single set of capabilities;
  • Financial Regionalisation Diverging regulatory priorities and customer needs will lead financial services in different regions of the world down distinct paths.

The research suggests that Fintechs have been successful defining the direction, shape, and pace of innovation across almost every sub-sector of financial services. The authors find evidence of companies which have succeeded as both stand‐alone businesses and by positioning themselves as crucial parts of financial value chains

And, they reveal, the Fintechs have recast the expectations of customers by investing and delivering much better user experiences. “Through innovations like rapid loan adjudication, Fintechs have shown that the customer experience bar set by large technology firms, such as Apple and Google, can be met in financial services.”

That presents a real challenge to established players, who may possess a strong understanding of the financial services sector but lack the technology firepower to go head to head with giant global businesses like Apple, Amazon, Google or Facebook.

“The accelerating tempo of the innovation cycle in financial services means that a financial institution’s success is predicated on business model agility and the ability to rapidly deploy partnerships, neither of which are traditional core competencies of these institutions.”

The expectation by many established businesses that all these new Fintechs would create a “supermarket” for capabilities, enabling them to quickly buy and deploy new offerings, is problematic for two reasons.

First, if you are a financial services company looking to accelerate innovation via acquisition, there are a lot of other businesses in your industry that have the same idea. That leads to competition and increased acquisition costs.

Second, the finance industry is not the only buyer in town — the tech companies are also on the lookout for opportunity. Investment by Google’s venture arm into businesses like Lending Club a few years ago is an example of such a move.

And there are some obvious areas where the Fintech’s can improve their proposition to make themselves even more attractive

Building trust is a big issue. Customers tend to take their money personally, and their willingness to switch from trusted long-term providers has been overestimated. They say customer switching costs are high, “… and new innovations are often not sufficiently material to warrant the shift to a new provider, especially as incumbents adapt.”

As they chip away at an early trust deficit Fintechs will increase the likelihood that they can establish new financial services ecosystems such as alternative payment rails or alternative capital markets.

Indeed a different piece of research just released last week – the 2017 World Wealth Report by Capgemini demonstrates an increasing willingness by the world’s wealthiest people to put their trust in the big technology vendors when it comes to wealth management services.

While only a few BigTech firms such as Alibaba and Amazon have entered (or signaled an intent to enter) into the business of wealth management, CapGemini argues their entry is “inevitable”.

The report which surveyed 2500 high net-worth individuals around the world found that respondents perceived BigTechs as offering increased efficiency, transparency, online excellence and innovation. This is especially true for younger (under 40) and those in Asia-Pacific (72.5 per cent), and those with $US20 million or more in assets (71.3 per cent).

In the World Bank report meanwhile, the authors suggest a big part of the current success of the Fintech’s lies in improving traditional ecosystems and infrastructure.

There is also some good news for incumbents.

According to researchers, “The rapid growth of the Fintech ecosystem allows firms to externalise parts of their innovation function, as they wait and see which new offerings gain traction before deploying their own solutions.”

After diving deeply into many of the financial services sub-sectors, the authors conclude that Fintechs could have more of a strategic impact if they shift emphasis beyond technology alone if they wish to usher in a material change in the competitive landscape.

And, they say, keep an eye out for the emergence of “minimum viable ecosystems” incorporating multiple stakeholders.

Regulatory differences between jurisdictions and geographies also need to be addressed. “Financial institutions will need to develop the flexibility to rapidly adapt to both large‐scale regulatory changes and regionally divergent regulatory treatment of emerging‐market infrastructure technologies,” they say.

Finally, they note that, while not sufficient in themselves, technology and regulatory change will continue to drive efficiencies, putting pressure on incumbents to consolidate their positions. This, in turn, will shorten the value chain.

About the authors

Kevin Hua is the co-founder of AtlasTrend which is a member of the Which-50 Digital Intelligence Unit. Members contribute their expertise for the benefit of our readers. Membership fees apply. Andrew Birmingham is the director of the Which-50 Digital Intelligence Unit.


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