‘Big Tech’ corporations such as Amazon, Facebook and Google pose a greater threat to banks’ underlying business models than the more diverse fintech sector. That’s according to new research from the World Economic Forum (WEF).
In a report titled Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services, the organisation hints that major technology players are simply biding their time before joining the financial services industry.
In particular, the WEF cites cloud computing, customer-facing artificial intelligence and ‘big data’ customer analytics as three domains that are becoming ever more crucial to competitive differentiation among financial firms.
All are areas in which technology giants such as Amazon, Google and Facebook have acquired far deeper experience than their financial services counterparts – and in which scale effects will make it harder for traditional institutions to catch up.
As a result, many banks and insurers are turning to technology firms to supply those core functions.
The WEF highlights three examples:
Meanwhile, the report notes that while fintech start-ups have achieved success in terms of changing the basis for competition, they have had a less disruptive impact upon the competitive landscape than expected.
WEF’s disruptive innovation in financial services expert Jesse McWaters, who authored the report, said: “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.”
In the WEF’s view, while those partnerships can accelerate innovation, they also pose a risk, in the event of large technology players entering the financial services market in direct competition with banks and insurers.
“Tech giants would be able to pick and choose their points of entry into financial services,” McWaters pointed out, “maximising their strengths such as rich datasets and strong brands, while taking advantage of incumbent institutions’ dependence upon them.”
With that in mind, financial institutions must negotiate a challenging path between capitalising on the services of their large technology partners and becoming hooked on their capabilities.
As far as fintech players are concerned, the report’s co-author – Deloitte Canada partner Rob Galaski – noted: “Fintechs have changed the basis of competition in financial services, but not the competitive landscape.
“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.”