A recent World Economic Forum (WEF) report has taken everyone in the financial services sector by surprise. According to the report, 'Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services', as against the common belief that the Fintech sector is going to be the endgame for banks, it is the technology giants like Facebook, Amazon and Google that pose a bigger threat to the longevity of banks and their services.

The report claims that these technology big weights are slowly but steadily hollowing out the value proposition of the financial institutions by carrying out more and more of their core functions, even as banks and insurers are really working hard to outdo them.

The WEF report also highlights that even though the Fintech sector had launched with a lot of fanfare, it hasn't been able to sustain the hype and transform the landscape of world finance as everyone had previously predicted. Though there's no denying the fact that Fintech has got the much needed innovation in the financial services sector but it has fallen depressingly short of capturing large market share and on the top of that, it is unfortunately reliant on partnerships with banks to achieve scale.

Giving his take on the dependence of the fintech sector on banks, Jesse McWaters, lead author of the study, and project lead, Disruptive Innovation in Financial Services at the World Economic Forum said that there's a high probability that the partnership between banks and large tech companies won't remain a reciprocal one, in the near future. "Financial institutions increasingly rely on technology firms for their most strategically sensitive capabilities, but can so far only offer their ongoing business in return," he added.

The WEF report also puts focus on the three main capabilities that have come to acquire an important status when it comes to competitive differentiation of financial institutions. These are: cloud computing, customer-facing artificial intelligence and Big Data customer analytics. A closer look on these three domain reveals that these are the strong points of tech big weights Amazon, Google and Facebook where they have far more experience than any existing financial institution in the world. Hence, banks are left with no option but to turn to the doors of these technology geniuses to provide them core functions.

Experts believe that the coming together of technology firms and banks is definitely good for innovation, but the banks are taking a huge risk tempting technology firms into the sector as if they decide to enter the financial services market directly, the banks will find it tragically hard to compete with them.

McWaters adds, "Tech 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."

The WEF report time and again warns the banks to stop seeing high-tech financial services start-ups as threat as they're comparatively smaller fishes in the sea when compared to the damage that the tech big weights are capable of doing.

According to Rob Galaski, partner, Americas FSI regional leader, Deloitte Canada, and co-author of the report, while Fintechs have proven their mettle in changing the basis of competition in financial services, they haven't achieved much when it comes to competitive landscape. "Fintechs now define the tempo and direction of innovation in financial services, but high customer switching costs and the rapid response of incumbents has challenged their ability to scale," he added.

Galaski gives the example of Robo-advisers, which provide automated investment advice at low fees, to provide an instructive example of how incumbents are responding to fintech. According to the report, while early players like Betterment and Wealthfront have demonstrated remarkable growth, with assets under management of $6.7 billion and $4.4 billion, respectively, in 2016. Unfortunately, their path to success has been slowed by the incumbents that have managed to creat their own robo-advisory offerings. One such incumbent is the Vanguard Advisor platform, which had $47 billion in assets under management by the end of year 2016.

Galaski in the report states, "The ability to be a fast follower has proven more important than being first for large financial institutions." He further adds, "Agile incumbents have used the fintech ecosystem as a supermarket for capabilities, making the ability to nurture and rapidly form partnerships a critical ingredient to banks’ competitive success.”

One of the most important things that the WEF report unearthed was the emergence of distinct financial systems in the US, China and Europe, red flagging concerns over the need for international regulatory coordination.

While China is seeing country's tech giants like Ant Financial and Tencent emerging as leading providers of a range of financial services, on the other hand, United States has a traditional bank-led model into motion. Meanwhile, in Europe, the Second Payment Services Directive will most likely open up banks’ customer data leading to creation of an environment which sees more gruesome competition between incumbents and the new players.

Bob Contri, principal, Deloitte Consulting, and an adviser to the report also had an interesting take to offer on the whole issue. According to him, "Technology is not driving a global convergence in customer experience, instead divergent customer demand and regulatory priorities are creating distinctly regionalised financial ecosystems." He feels that this could grow to become a humongous problem for regulatory coordination, as regulators will have a hard time understanding the disparate nature of the impacts that each region will experience once global regulations come into play.

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