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Banks should be more concerned about Regulation and the growing power of big cloud firms, rather than fintech startups: WEF report

Fintechs have materially changed the basis of competition in financial services, but have not yet materially changed the competitive landscape, according to a new report released on Aug 22 by the World Economic Forum with support from Deloitte Consulting.

The report, “Beyond Fintech: A pragmatic assessment of disruptive potential in financial services” explores the main drivers of future change, citing that fintechs represent the first wave in a series of disruptive forces that will likely shape the future of the industry. The report represents the culmination of three years of research into the transformative role of fintechs.

Fintechs give traditional financial institutions new and innovative ways to meet customers’ changing needs, said WEF.

Rob Galaski

“Fintechs have changed the pace of innovation and reshaped customer expectations across the financial services ecosystem, laying the foundation for future disruption in the industry,”

said Rob Galaski, partner, Americas FSI Regional Leader, Deloitte Canada.

“The success of fintechs in changing the basis of competition, as well as the increasing pace of technology, means that incumbents have the potential to improve rapidly—but also face rapid disruption going forward.”

R Jesse McWaters

“However, many consumer facing fintechs have struggled to achieve scale in the face of high switching costs,”

said R. Jesse McWaters, Financial Innovation Lead at the World Economic Forum.

“Meanwhile incumbent financial institutions have been able to catch up faster than many expected, treating the proliferation of fintechs as a supermarket for capabilities that allow them to use acquisitions and partnerships to rapidly deploy new offerings.”

The report identifies eight key forces that have the potential to shift the financial services landscape. These forces include three core findings:

Platforms Rising

The rise of customer choice will have profound implications on the design and distribution of products, and will likely force companies to shift roles. Platforms that offer the ability to engage with different financial institutions from a single channel may become the dominant model for the delivery of financial services.

The rise of these platforms, such as open banking, will likely reshape financial services from clearly defined organisations to interchangeable entities, said the report. This may require that platform owners are capable ecosystem managers, balancing the needs of the product manufacturers with customer demand.

However, the report also notes that customers’ preferences may quickly be shifting to digital channels, but physical branches remain a critical component of the banking experience. Many customers have banking needs which only physical locations can currently fulfil. For instance – getting a same‐day wire transfer for a home purchase. Other customers also prefer a channel based on human interaction.

Customers may be going digital but they still want a physical banking experience based on human interaction.

Financial Regionalisation

Differing regulatory priorities, technological capabilities, and customer needs are challenging the narrative of increasing financial globalisation and making way for regional models of financial services suited to local conditions, said the report. Even global firms may need distinct strategies to cultivate regional competitive advantage and integrate with local ecosystems.

Meanwhile, fintechs will likely face serious obstacles to establishing themselves in multiple jurisdictions, even as technology lowers barriers to entry. Incumbents may become attractive partners for fintechs seeking to enter new markets as they look for opportunities to rapidly acquire scale.

Systemically-Important Techs

Efforts by incumbent financial institutions to emulate the core capabilities of large technology firms will likely lead to an increasing reliance on those same large technology firms. For example, as financial institutions seek to enhance customers’ digital experiences and unlock data and revenues from customer platforms, they are increasingly dependent on large techs’ cloud-based infrastructure to scale and deploy processes and to harness Artificial Intelligence as a service.

As financial institutions seek new advantages to grow their competitive footprint, they will be left with tough choices: become dependent on large technology companies or risk falling behind on technological offerings if they minimise engagement to protect independence.

Bob Contri

“Differing regulatory priorities, technological capabilities, and emerging platforms are rising as key issues for the industry,”

said Bob Contri, principal, Deloitte Consulting LLP (US); Deloitte Global Financial Services Industry Leader.

“But in addition to these forces, there are a number of open questions that will influence the future of all financial services sectors, ranging from the role of digital identity to how financial services firms will mitigate risk, how data flows will be monetised, and more. With all of these uncertainties, it is clear that disruption and evolution are the new status quo for the industry.”

Other trends uncovered in the report include experience ownership, where the owner of the customer interface will wield more influence in the customer experience; and the bionic workforce, where machines are increasingly able to replicate the behaviours of humans, so financial institutions will need to manage labour and capital as a single set of capabilities.

Some key takeaways for financial institutions are:

The rise of product platforms in digital banking will force market participants to make a choice between a strategic focus on product distribution (i.e. becoming the platform) or a focus on product manufacturing. This choice will have far‐reaching implications for their businesses and customer interaction models, as well as for their competitive landscape
Despite innovations in origination and adjudication, the online lending model is fundamentally limited by high and unstable funding costs in its ability to compete with banks. The need for a consistent funding source at a cost similar to that of deposits for banks will drive online lenders to acquire banking licences – unless an alternative funding source can be found.
As robo‐advisors become more ubiquitous and more sophisticated, leading investment management companies will look to use these capabilities to deepen their engagement with robo‐advisory customers, drawing on new sources of data to deliver advice on all aspects of their financial lives. This will mark the start of a change in their role from robo‐investors to true robo‐advisors.