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”.