The FinTech Revolution That Wasn't: How Financial Institutions Co-Opted Their Disruptors
It's the disruption that wasn't. According to a World Economic Forum report released this month, FinTech firms have not found the traction to overthrow incumbent large financial services institutions. In fact, these technologies have actually strengthened them. Here's how.
Too Big to Disrupt?
We often think of start-up companies as the most dangerous things to existing institutions. You only have to look as far as Amazon and Uber to see the impact lean, tech-centirc entrepreneurs can have on legacy industries. But the new report "Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services," finds this has not been the case in financial services.
The research team, — lead by World Economic Forum's project lead on disruptive innovation in financial services, R. Jesse McWaters — examined the technologies that could potentially impact the financial services industry as we know it.
Their findings point to a financial services environment in which the large institutional players have so much customer inertia that the smaller FinTechs have had a hard time capturing market share. Meanwhile, the report says, "The rapid growth of the fintech ecosystem allows firms to externalize parts of their innovation function," and, "The proliferation of fintechs provides financial institutions with a 'supermarket' for capabilities, allowing them to use acquisitions and partnerships to rapidly deploy new offerings."
Where FinTech Succeeds and Fails
In summary, the report finds that FinTechs have succeeded and failed in different ways.
FinTechs have succeeded in:
- Setting the pace, shape and direction of innovation.
- Reshaping consumer expectations for service and the customer experience.
FinTechs have failed to:
- Convince customers to switch away from their incumbent financial services providers.
- Establish a new financial services ecosystem or lay the infrastructure that could support them in the future.
The net effect of FinTech thus far has not been to show consumers new ways they'd rather do things, but to show the existing institutions how they can provide new services for their clients. That's a huge difference from how similar movements have impacted other industries. Looking market to market, you have to give financial services firms credit for getting on the bus before it runs them over.
Big Tech May Succeed Where FinTech Falls Short
While adding FinTech capabilities makes existing firms stronger, the report does not let them off the hook yet. In fact, it identifies ight major factors that could lead to disruption in the future.
Chief among those threats is the commoditizing impact of large tech companies taking over the plumbing work of financial institutions. While this will drive down overhead and improve the customer experience, thus enhancing customer loyalty, the report sees the shift as something that could eliminate market advantage and differentiation created by companies that do those things well already.
As data and processes become commoditized by "Big Tech," and customers become more accustomed to the Amazon-like customer experience that could offer, financial services institutions could become more vulnerable to smaller companies and alternative platforms that allow for customized services and higher customer satisfaction.
In other words, the easier it becomes for customers to access equivalent or better services across a variety of platforms, the closer large financial institutions come to the book stores and taxi companies of yesterday.