Global technology firms' innovations and expansion into retail financial services will slice a portion of financial firms' control of their user base, Moody's Investors Service says in a new report.
In response, financial firms will accelerate digitalization efforts as online ecosystems already controlled by large global echnology businesses grow further.
Moody's examines how this growth will affect incumbent financial firms, including banks, insurers, asset managers and brokers. In a central scenario, these firms will cede a portion of their control over the distribution of retail financial services despite efforts to increase their presence on digital platforms. In an alternate scenario, big tech firms would control a larger share of distribution and manufacturing, eventually leading to the displacement of a number of financial incumbents, particularly those that fail to execute timely and comprehensive digital strategies.
User experience has become the primary factor in retaining and acquiringnew customers, and will play a key role in determining where and how consumers will access their financial needs. Losing control over a portion of customer relationships, which is credit negative to financial firms, stems from big tech companies expanding distribution and inclusion
of retail financial services within their ecosystems. Initially, the provision of these services will likely be done in partnerships with financial incumbents.
"Big tech companies have an advantage over financial firms since they have significant experience in optimizing customers' user experience and have been able to grow their market share in part because consumers find their products add value, are easy and convenient to use, and have increasingly compelling digital ecosystems." according to Moody's Vice President Stephen Tu, one of the authors of the report
"Through innovation, tech companies can provide value in financial services in entirely new ways," says Warren Kornfeld, a Moody's senior vice president and co-author of the report. "This is accomplished by offering fresh capabilities through aggregation and customization of products, services and offerings, and through large-scale networks or digital communities."
However, while well-known big tech firms are potential sources of competition in retail financial services, they are likely to avoid manufacturing financial products due to regulatory burdens.
Though steering clear of directly manufacturing financial products such as deposits and lending, big tech will continue to expand in the distribution and inclusion of financial services in their ecosystems, which could lead to big tech controlling a large portion of the consumer relationship. Thus, turning a portion of financial firms primarily into manufacturers.
The report "Financial Institutions -- Global: Threat of big tech disruption is real," is available to Moody's subscribers at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120094. To listen to our podcast with the key takeaways from this report please visit www.moodys.com/bigtechpodcast