Will innovation in financial services see banks successfully challenge the emerging models of small, smart fintechs? Will financial institutions themselves face new challenges to their business models from large, global tech firms? In short, who’s going to eat who in the financial services sector, as the forces of change are unleashed by new innovations in technology?
These are just some of the questions answered by an important report from the World Economic Forum, “Beyond Fintech”, published yesterday. This is a project I’ve been closely involved with from its inception at a conversation in Davos, four years ago, on the need for authoritative research on the disruptive forces of innovation that will shape the future of financial services.
The strategic challenges and opportunities that lie ahead, which are clearly outlined by the report, have hugely important implications. These implications matter for everyone in the financial services community, from fintech startups to established financial institutions; their suppliers, regulators and, ultimately, consumers.
The report draws on interviews and workshops with hundreds of financial and technology experts. It covers a huge amount of ground but three key themes are highly relevant to all of us who work in the City today.
First, fintech innovators appear to have been less disruptive than expected because they have largely failed to change the basis for competition or to challenge incumbent financial institutions. One of the limitations for fintech innovators has been that new technology fails to create new market infrastructure unless groups come together to build a viable ecosystem. New technologies don’t flourish without a supportive community. Instead, existing financial institutions have become fast followers by using the fintech innovation ecosystem as a supermarket for capabilities. The fast growth fintech space will certainly continue to thrive, not least because of the trend for regulators to open sandboxes allowing protected risk-taking and even going so far as seconding staff to incubators.
Second, the biggest challenge for financial institutions is that large tech firms will attack their business. This threat is becoming more acute because big tech firms have led the way in redefining customer expectations of service. Financial institutions are therefore increasingly turning to them, as suppliers, to overhaul their own systems and raise their own customer experience in line with higher expectations, particularly in the areas of cloud computing, AI, and Big Data analytics.
While this strategy has accelerated innovation, it carries the risk that tech companies will in future make the switch from partners to competitors, offering financial services directly, leveraging their large customer data sets and strong consumer brands. However, this competition will not be head-on. This is because the tech firms are in many cases subtly redrawing the boundaries of financial services, particularly in the areas of payments and e-commerce, which makes the challenge for financial institutions harder to deal with.
And third, the global regulatory consensus that followed the global financial crisis is weakening, with distinct financial systems in China, Europe and the United States. Being successful will require the ability to adapt rapidly both to large‐scale regulatory changes (such as MiFID II) while also being nimble when it comes to regional regulatory demands in emerging markets.
As the City returns from the summer break, refreshed and reenergised, the lessons to be drawn from this research for the future of our industry are important; all the more so at a time when we are experiencing breakneck speed of innovation and change across the industry.
Two implications of the research are particularly important for financial institutions that want to be the winners of the future. Incumbents must embrace change by partnering and collaborating in open ecosystems with fintechs. And they need to follow the lead of the technology firms, by designing back from the customer experience not forward from the product.