Tech Banking

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The competitive landscape in banking and insurance is being shaped increasingly by large technology firms supplying critical technology to the sector, opening the door to direct competition at a later stage.

This is according to a report from the World Economic Forum (WEF), which found that financial institutions’ drive to become more “experience-driven” is opening the door to potential competition from global technology giants.

According to the report: “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 more heavily on them to compete.

“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 for disruptive innovation in financial services at WEF.

“Financial institutions increasingly rely on technology firms for their most strategically sensitive capabilities, but can so far only offer their ongoing business in return,” says McWaters

 The report aims to examine the impact of innovation on the financial ecosystem and draws on interviews and workshops with hundreds of financial and technology experts.
It 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.

WEF says 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, it adds.

While these partnerships between financial institutions and tech companies can accelerate innovation, the report points out 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.

As a result, financial institutions will likely need to walk a challenging line between capitalising on the services of large technology players and becoming dependent on them.

“For customers, the entry of large technology firms into financial services could mean entrusting both their financial and non-financial data to the same company. For policy-makers, it would raise serious questions about how best to avoid both anti-competitive behaviour and the inappropriate use of personal data in decision-making,” WEF says.

The findings suggest a move away from a focus on the potential competitive threat of hi-tech financial services start-ups, typically called “fintechs”. Much research, including the WEF’s 2015 report on The future of financial services, suggests niche fintechs could stage a broader disruption of the financial system.

But the new report finds fintech start-ups have fallen short of their ambitions to upend the competitive landscape in finance. Despite deeply influencing the direction of innovation in the industry, many have failed to capture large market share.

“Fintechs have changed the basis of competition in financial services, but not the competitive landscape,” says Rob Galaskipartner and Americas FSI regional leader at 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.

WEF says early innovators like Betterment and Wealthfront have shown significant growth, with assets under management of $6.7 billion (R87 billion) and $4.4 billion (R57 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 (R610 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. Agile incumbents have used the fintech ecosystem as a supermarket for capabilities, making the ability to nurture and rapidly form partnerships as a critical ingredient to banks’ competitive success,” Galaski concludes.