What’s Disrupting Traditional Finance? ‘Big Tech,’ Not Fintech

In a report published last week, the WEF said 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 ever more heavily on them to compete.

The report, titled "'Beyond Fintech': A pragmatic assessment of disruptive potential in financial services," also notes that fintech start-ups, while achieving success in terms of changing the basis for competition, have had less impact than expected in disrupting the competitive landscape.

Jesse McWaters, lead author of the report and project lead (disruptive innovation in financial services) at the WEF, 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."

The report drew on interviews and workshops with hundreds of financial and technology experts, examining 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.

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, the report noted.

As a result, many banks and insurers are turning to technology firms to provide these core functions. For instance, Amazon Web Services (AWS) provides services to dozens of finance companies, including Aon, Capital One, Carlyle, Nasdaq, Pacific Life and Stripe.

Brazil's Banco Bradesco Facebook app allows customers to conduct day-to-day banking from the social network, and relies on its customer data analytics to target users. Capital One and Liberty Mutual's 'Alexa solution (a voice-activated personal assistant), which allows customers to check balances, pay bills and track spending through these devices, is another example.

While these partnerships can accelerate innovation, the report points out that they also pose a risk should large technology players choose to enter financial services in direct competition with retail banks and insurers.

"Technology 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," McWaters added.

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.

Other dilemmas are likely to surface too. 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.

The WEF recommends a move away from a focus on the potential competitive threat of fintech firms, which have deeply influenced the direction of innovation in the industry, as doubts were surfacing about their ability to directly challenge incumbent financial institutions.