A report by the World Economic Forum (WEF) has found that start-ups may be less disruptive to the financial services ecosystem than global technology companies such as Amazon, Facebook and Google, William Turvill writes in
City AM.
The WEF’s paper assesses areas such as cloud computing, customer-facing artificial intelligence and big data customer analytics. These are all vital areas for financial services companies who are becoming more experience-driven. But according to Turvill, the report says that big technology firms have “far deeper experience [in these areas] than their financial services counterparts”.
Jesse McWaters, lead author of the study, is quoted as saying: “The partnership between banks and large tech companies risks not staying a reciprocal one.
“Financial institutions increasingly rely on technology firms for their most strategically sensitive capabilities, but can, so far, only offer their ongoing business in return.”
Examples of this increasing reliance includes the use of Alexa, Amazon’s intelligent personal assistant, by Capital One and Liberty Mutual, and the utilisation of services on Facebook for customers of Brazil’s Banco Bradesco.
McWaters goes on to say that, going forward, “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”.
City AM article
Customer reaction and regulation a potential barrier to entry
The point McWaters makes about datasets is picked up by John Detrixhe, writing for
Quartz.
According to Detrixhe, the WEF report says that Amazon already uses sales data to measure the risk of offering credit to merchants that use its platform, with over $3bn of loans already made, and plans to widen the offer. Sellers can also be cut from the platform if their loan defaults.
“Fintech has changed the basis of competition in financial services, but not the competitive landscape” Despite the potential that lies in the financial sector for these technology companies, they have, so far, remained on the edges. A reason for this is that entering as a disruptor would lead to increased exposure to regulation, which would involve heavy amounts of compliance.
The WEF paper highlights another issue, writes Detrixhe: the question of how policy will be affected by their entrance and the resulting questions on monitoring anticompetitive behaviour and the appropriate usage of personal data.
The customers, too, could prove to be a barrier. Amazon, Facebook and Google are already entrenched in modern day-to-day life. Will customers accept further incursions into their lives?
Quartz article
Fintech companies have difficulty scaling up
One of the big conclusions of the report is that fintech firms are having less of an impact than expected. CNBC’s Ryan Browne asks why.
The article quotes a statement made by Rob Galaski, co-author of the report and Canadian lead for financial services at Deloitte: “Fintech has changed the basis of competition in financial services, but not the competitive landscape.”
He said that fintech firms “define the tempo and direction of innovation in financial services”, but their ability to scale is challenged by high customer switching costs and the rapid response of incumbents, while large financial institutions benefit more from being a “fast follower” than “being first”, with a “critical ingredient” of banks’ competitive success being their ability to form and nurture partnerships.
Browne says that the WEF’s conclusions are not unique, citing a phone interview with CNBC and IBM’s Brigid McDermott, vice president for blockchain business development, who said: “Some of the start-ups that are coming in don't necessarily understand the scope of the transactions that are running all the time. When you think about banking as an $8–9tn industry, that's a lot of transactions.
“When you come at it as a start-up and you're trying to look at a small part, do you really have a sense of what the transformation is that needs to happen?”
Browne refers to another interview between CNBC and McWaters, which reaffirms Galaski’s view on how the financial services sector views fintech. “Fintech is making inroads in defining what the user experience of the future is,” he said.
“Lending Club and OnDeck have really defined what a lending experience should look like, and then you're seeing banks try and copy that as effectively as possible.”
Fintech is shaping the sector, but in an innovative sense instead of a competitive one. Technological firms can further shape matters if they decide to get involved. That, though, wouldn’t come without risk.
CNBC article
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