Fintech start-ups have been the focus of a great deal of attention in the banking industry, as these firms have combined digital technology with advanced analytics to provide easy-to-use applications that have impacted virtually every aspect of traditional banking. While being a source of advanced innovation, the vast majority of these start-ups have had difficulty achieving scale, however, with the prospect of partnering with traditional banks becoming more commonplace.
In the World Economic Forum report titled Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services, it is noted that fintech start-ups, while achieving success in terms of changing the basis for competition, have had less impact than expected in disrupting the overall competitive landscape. More importantly, the report found that there is increasing competition from global tech giants such as Google, Amazon, Facebook and Apple.
“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,” states the report. The report highlights that cloud computing, customer-facing artificial intelligence (AI) and advanced analytics are three capabilities that are becoming critical to the competitive differentiation of financial institutions. These capabilities are also where technology giants like Google, Amazon, Facebook and Apple have far deeper experience than legacy banking organizations. As a result, many banks and insurers are turning to technology firms to provide these core functions.
For instance, Amazon Web Services (AWS) provides services to dozens of finance companies, including Aon, Bankinter, Capital One, Nasdaq, Pacific Life and Stripe. Another Amazon connection is that Capital One, American Express and USAA have built Alexa voice-activated personal assistant solutions. “Tech giants are able to pick and choose their points of entry into financial services; maximizing their strengths like rich data sets and strong brands, while taking advantage of incumbent institutions’ dependence on them,” states Jesse McWaters, lead author of the study.
Eventually, financial institutions will likely need to determine whether to capitalize on the services of large technology players or becoming dependent on them.
The WEF report uncovered eight forces that have the potential to shift the competitive landscape of the financial ecosystem.
- Cost commoditization: Financial institutions are embracing new technologies to accelerate commoditization of cost drivers.
- Profit redistribution: The location of profit pools within and between value chains are shifting with new technologies.
- Experience ownership: Distributors will enjoy a position of strategic strength as owners of customer experience; manufacturers are expected to become hyper-scaled and hyper-focused.
- Platforms: Financial institutions are shifting to multiple-provider platforms as a channel to distribute and trade across geographies.
- Data monetization: Financial institutions are starting to use a combination of data strategies to follow the lead of tech firms in data monetization.
- Bionic workforce: New technologies such as Artificial Intelligence will mean major shifts to financial institutions’ workforces.
- Systemically important techs: Financial institutions of all sizes rely on large tech firms’ capabilities.
- Financial regionalization: Diverging regulatory priorities and customer needs is making way to tailored regional models of financial services.
Impact of Regional Regulatory Differences
Due to regulatory differences worldwide, companies like Ant Financial (a subsidiary of Alibaba) and Tencent (the parent company of WeChat) in China have emerged as leading providers of a range of financial services – very different from the traditional bank-led model dominant in the United States.
In addition, the enactment of the Second Payment Services Directive (PSD2) in Europe 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 regionalized financial ecosystems” said Bob Contri, Industry Leader at Deloitte Global Financial Services, 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”.
Banking Industry Has Options
A strategic option that the banking industry has available is “application programming interfaces” (APIs), where banks could partner with smaller fintech firms to build new banking products, become product distributors or even platform managers. This could allow both financial and non-financial services to be offered by banking organizations.
The WEF said the banking industry could benefit from open platforms because “brand image becomes even more important than before, and banks would have an advantage … in the race to become distributors due to their existing customer base”. Customers still trust their primary provider which could be leveraged to the banking industry’s benefit.
While a potential benefit for the banking industry, the WEF mentioned that little is understood about the economic and competitive potential of APIs due to the newness of the concept. “The uncertainty has discouraged incumbents and financial services software providers from investing in platform banking solutions, particularly as the incremental scale required to offset potential cannibalization is unclear.”