17 December 2017
visit www.avoka.com

Amazon, Facebook, Google et al pose bigger threat to banks than fintech startups - WEF

22 August 2017  |  20666 views  |  4 chess

Large technology firms like Facebook, Amazon and Google are a bigger threat to banks than fintech startups says the World Economic Forum, in a report which dissects the evolving landscape for financial services.

According to the study, '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.

Fintech start-ups, meanwhile, 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 have changed the basis of competition in financial services, but not the competitive landscape” says 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”.

Robo-advisers, which provide automated investment advice to customers at low fees, provide an instructive example of incumbents responding to fintech, suggests Galaski. Early innovators like Betterment and Wealthfront have shown significant growth, with assets under management of $6.7 billion and $4.4 billion, respectively, at the end of 2016. However, they have been dwarfed by incumbents that have created their own robo-advisory offerings, such as the Vanguard Advisor platform, which had $47 billion in assets under management as of the end of 2016.

“The ability to be a fast follower has proven more important than being first for large financial institutions,” says 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.”

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”.

Comments: (4)

A Finextra member
A Finextra member | 23 August, 2017, 09:28

WP: I think this conclusion is slightly premature.  Let's see what happens to current accounts when the challenger banks start offering them as standard.  I see hordes of people who can't wait to switch, and have not seen anything positive about Google Bank.  There are plenty of articles about why it won't happen, and some of them even mention the challenger banks as being more likely competitors.

1 thumb up! 1 thumb up! (Log in to thumb up)
Melvin Haskins
Melvin Haskins - Haston International Limited - | 23 August, 2017, 15:43

I am unsure how many people outside of the USA would trust having their money managed by a US corporation. I certainly wouldn't here in the UK.

1 thumb up! 1 thumb up! (Log in to thumb up)
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 23 August, 2017, 17:10

@MelvinHaskins: 

"outside of the USA" - what is there? You mean there are actually other countries outside the USA?? Jokes apart, I thought Citi is quite popular in UK / EU.

Be the first to give this comment the thumbs up 0 thumb ups! (Log in to thumb up)
Philippe Guenet
Philippe Guenet - Henko - PURLEY | 23 August, 2017, 23:35 Strange that the article does not mention about the disintermediation of the customers from their bank with PSD2. This will challenge the dynamics of the market and though the banks are likely to remain, they may be pushed as Utilities, and chances are that the margins to will be higher at the touch points than at the Utility level. So fintechs will be in with a big chance and platforms / portals are bound to step in there, but they won't need to do the full end to end service to rival.
Be the first to give this comment the thumbs up 0 thumb ups! (Log in to thumb up)
Comment on this story (membership required)

Finextra news in your inbox

For Finextra's free daily newsletter, breaking news flashes and weekly jobs board: sign up now

Related stories

Blockchain to become 'beating heart' of financial system

Blockchain to become 'beating heart' of financial system

12 August 2016  |  23569 views  |  0 comments | 53 tweets | 74 linkedin
International co-operation essential to manage virtual currency risks - IMF

International co-operation essential to manage virtual currency risks - IMF

21 January 2016  |  4304 views  |  0 comments | 6 tweets | 6 linkedin
Tech revolution to wipe out 7.1 million jobs over next five years - WEF

Tech revolution to wipe out 7.1 million jobs over next five years - WEF

18 January 2016  |  7408 views  |  2 comments | 17 tweets | 15 linkedin
Fintech comes to Davos

Fintech comes to Davos

13 January 2016  |  12800 views  |  0 comments | 41 tweets | 15 linkedin
Fintech to bridge $2 trillion SME funding gap - World Economic Forum

Fintech to bridge $2 trillion SME funding gap - World Economic Forum

27 October 2015  |  14634 views  |  0 comments | 25 tweets | 22 linkedin

Related blogs

Create a blog about this story (membership required)
visit www.ebaday.comvisit www.niceactimize.comvisit www.atos.net

Top topics

Most viewed Most shared
satelliteRipple completes XRP Lockup
10585 views comments | 3 tweets | 2 linkedin
PSD2: Laying the regulatory foundation for a new age in paymentsPSD2: Laying the regulatory foundation for...
10175 views comments | 18 tweets | 36 linkedin
Banks tap Ethereum smart contracts for MiFID II complianceBanks tap Ethereum smart contracts for MiF...
7344 views comments | 9 tweets | 10 linkedin
Banks and fintech startups join forces on blockchain-based supply chain pilotBanks and fintech startups join forces on...
7271 views comments | 19 tweets | 22 linkedin
hands typing furiouslyReshaping Customer Engagement & Da...
6679 views 0 | 4 tweets | 2 linkedin

Featured job

Find your next job