A new status quo in financial services: Deloitte and World Economic Forum

23 Aug 2017: Fintechs materially changed the basis of competition in financial services, but they have not yet changed the competitive landscape, according to a new report released today by the World Economic Forum with support from Deloitte.

The report: “Beyond Fintech: A pragmatic assessment of disruptive potential in financial services” represents the culmination of three years of research into the transformative role of fintechs. This comprehensive report builds on the initial Deloitte and World Economic Forum 2015 research and looks beyond the first fintech wave of change to explore the main drivers of future change and identify a series of disruptive forces that will likely shape the future of the industry.

Co-author of the report and Partner, Americas FSI Regional Leader, Deloitte Canada, Rob Galaski said: “Fintechs have changed the pace of innovation and reshaped customer expectations across the financial services ecosystem. They have laid the foundation for future disruption in the industry and been successful in changing the basis of competition. This together with the increasing pace of technology, means that incumbents have the potential to improve rapidly - but also face rapid disruption ahead.”

Project leader and World Economic Forum Financial Innovation Lead R. Jesse McWaters said: “Many consumer facing fintechs struggled to achieve scale in the face of high switching costs. Meanwhile incumbent financial institutions were able to catch up faster than many expected, treating the proliferation of fintechs as a supermarket for capabilities and using them as acquisitions and partnerships to rapidly deploy new offerings.”

Deloitte Australia Financial Services Innovation Partner leader Kazunori Aoki said: “Australia is no different from the rest of the world1. Fintechs haven’t provided the impetus that we first thought they would to change the competitive landscape, because they haven’t been able to convince customers to move away from incumbents2.

“Incumbents’ market scale and broad customer bases ensured they maintained their competitive advantage. However we believe the imminent open data regime, in combination with a broader cloud play and platforms that offer the ability to engage with different financial institutions from a single channel, will change all that .

“We expect that these forces, along with the shifts from our domestic and global regulators to make financial services a more level playing field, will cause overseas banks to eye our Australian market even more keenly.”

The report identifies eight key forces that have the potential to shift the financial services landscape. These forces include three core findings:

1. 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 channel may become the dominant model for the delivery of financial services. The rise of these platforms, such as open banking is likely to 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.

2. 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 be likely to 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.

3. Systemically Important Techs

Efforts by incumbent financial institutions to emulate the core capabilities of large technology firms will be likely to lead to an increasing reliance on those same large technology firms. For example, 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.

Lipman concluded: “The reality is that trust is the key. As financial services continue to focus on how best to protect, reframe and refresh their brands for trust, and offer convenience and pricing choice, along with the freedom of physical and digital distribution, and best of breed products then there is no reason they shouldn’t be able to maintain their core value proposition of providing customers with financial security for the long term.”

Differing regulatory priorities, technological capabilities, and emerging platforms continue to rise as key issues for the industry, Deloitte Japan Financial Services leader Jeams Reichbach explained. “But in addition to these forces, there are a number of open questions that will influence the future of all financial services sectors. These range from the role of digital identity to how financial services firms will mitigate risk, and how data flows will be monetised. With all of these uncertainties, it is clear that disruption and evolution is the new status quo for the industry.”

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 is likely to transfer to the owner of the customer interface meaning that pure manufacturers must 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 and used in real-time
• Bionic Workforce: As the ability of machines to replicate the behaviours of humans continue to evolve, financial institutions will need to manage labour and capital as a single set of capabilities.

To download the report and for more information, please visit Beyond Fintech

Endnotes:

1. As identified by the Forum’s financial services, innovation and technology communities, academia and the public sector, involving 150 outreach interviews and 10 international workshops including Australia. Senior leaders from global financial institutions also provided guidance, oversight and the thought leadership as members of the Steering Committee

2. See Platforms Rising