NewsWEF and Deloitte Report: Fintechs are changing the game rules in financial services

Fintech companies have materially changed the basis of competition in financial services, but have not yet materially changed the competitive landscape. However, according to a new report released by the World Economic Forum with support from Deloitte the change is becoming a new status quo. The report, “Beyond Fintech: A pragmatic assessment of disruptive potential in financial services” explores the future of financial services, 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 have changed the pace of innovation and reshaped customer expectations. Thus, they laid the foundation for future disruption in the industry,”  says Pavel Šiška, Partner in Charge, Consulting, Deloitte. “In such an environment, incumbent financial institutions have an opportunity to develop in a much faster pace, however, they are simultaneously facing new challenges as new, more flexible players join the game. And there are many of them. For example, the fintech environment is very competitive in the Czech Republic. Based on our estimate, the size of the local fintech market amounts to EUR 190 million, ie approximately to CZK 5 billion.”

Based on the recent WEF and Deloitte study, the solution may lie in partnerships and acquisitions between large financial players and technological companies bringing innovations. The study defines three basic factors of the future development:

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 online 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. This may require that platform owners are capable ecosystem managers, balancing the needs of the product manufacturers with customer demand.

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. 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. 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.

“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 is the new status quo for the industry,” adds Štěpán Húsek, Partner and the Leader of Deloitte Technology Advisory Services Team.

Additional forces uncovered in the report include:

  • Cost Commoditisation: Financial institutions may aggressively commoditise their cost bases, removing it as a point of competition and creating new grounds for differentiation.
  • Profit Redistribution: Technology will likely enable organisations to bypass traditional value chains, thereby redistributing profit pools
  • Experience Ownership: Power will likely transfer to the owner of the customer interface; pure manufacturers must therefore become hyper-scaled or hyper-focused
  • Data Monetisation: Data may become increasingly important for differentiation, but static datasets will likely be replaced by flows of data from multiple sources combined and used in real-time
  • Bionic Workforce: As the ability of machines to replicate the behaviours of humans continue to evolve, financial institutions will likely need to manage labour and capital as a single set of capabilities.

You can download the original English report here.