Google and Facebook a bigger threat to banks than fintech startups
Financial institutions’ drive to become more “experience-driven” is opening the door to potential competition from global technology giants, according to a report published by the World Economic Forum.
The report, Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services, found that large technology firms are hollowing out the value proposition of banks and insurers by carrying out more core functions, even as banks and insurers lean ever more heavily on them to compete.
It also found that fintech startups, while achieving success in terms of changing the basis for competition, have had less impact than expected in disrupting the competitive landscape.
“The partnership between banks and large tech companies risks not staying a reciprocal one,” said Jesse McWaters, lead author of the study, and Project Lead, Disruptive Innovation in Financial Services at the World Economic Forum.
“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 draws on interviews and workshops with hundreds of financial and technology experts. It highlights 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.
As a result, many banks and insurers are turning to technology firms to provide these core functions, the WEF said.
Examples include:
- Amazon Web Services (AWS), which provides services to dozens of finance companies, including Aon, Capital One, Carlyle, Nasdaq, Pacific Life and Stripe
- Brazil’s Banco Bradesco Facebook app, which allows customers to conduct day-to-day banking from Facebook, relying on the social network’s 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
While these partnerships can accelerate innovation, the report pointed out that they also pose a risk should large technology players choose to enter financial services in direct competition with retail banks and insurers.
“Tech giants would be able to pick and choose their points of entry into financial services; maximizing their strengths like rich datasets and strong brands, while taking advantage of incumbent institutions’ dependence on them,” said McWaters.
As a result, financial institutions will likely need to walk a challenging line between capitalizing on the services of large technology players and becoming dependent on them.
Read: UCT launches first specialist Fintech degree in South Africa
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