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Digital banking Updated: 22 Sep 2017

Fintech companies have changed the rules, but not the game

A study by the World Economic Forum (WEF) compares the real impact of fintech companies on the world of finance to their own predictions two years ago. Their conclusion: the fintech companies haven´t met many of their forecasts.


Does anyone remember hearing it said that Instagram was a pastime for adolescents? Or that no one would pay to see a television series? Life is full of failed predictions, and institutions, universities and think tanks have made errors in this regard. The courageous thing is to go back to what one said a couple of years ago to see when you were right or wrong. That’s precisely what the World Economic Forum (WEF), the non-profit organization that coordinates the Davos Forum, did in collaboration with the consulting firm Deloitte.

Since the end of 2014, the Davos Forum has paid special attention to the fintech phenomenon, an interest that has prompted the publication of three reports on the subject. Now, in a fourth study, they have retraced their steps to compare the realities of mid-2017 with the forecasts the same institution made in 2015.  Which of the ideas they discussed at that time have had the most impact? Which ones  haven´t lived up to expectations? And what will happen in the near future?

Their conclusions are the result of a study that lasted more than 10 months, in which the experts at WEF and Deloitte interviewed 150 professionals in the finance industry (from both consolidated banks and fintech companies) and maintained ten working groups with more than 300 participants in six financial hubs in five countries (Switzerland, the United Kingdom, China, the United States and Canada). Among the experts consulted was Beatriz Giménez, Head of New Digital Business Strategy at BBVA.

The principal conclusion of the study is that the fintech companies have influenced the way in which financial services are structured and how they used by citizens, but they have not yet been able to establish themselves as relevant actors in the industry. When the fintechs appeared, their idea was to substitute established banking, but now they have changed their strategy and think more about coming to agreements, as they seek to attain scale and capture clients.

The stepped-up pace of innovation implies that for financial institutions, it is key to have an agile business model that is capable of quickly coming to agreements"

The fintechs, the study says, have succeeded in marking the direction and the speed of innovation in the sector; in addition, they have redefined the expectations of the consumer, proving that the finance industry in general had a lot to learn about user experience (UX). Now, anyone who approaches a financial institution expects to find something similar, in terms of UX, to what Google or Apple are offering.

But the fintech companies have not been able to make themselves sufficiently attractive to capture a considerable mass of customers, especially once the traditional banks began improving their adaptation to the new digital environment. But there’s a nuance: the situation is different in less mature markets, where traditional banking was not well established. That´s where the fintech companies have established a significant foothold.

But, more specifically, why have the fintech companies not fulfilled their expectations? According to the conclusions of WEF and Deloitte, they overestimated consumers’ desire to abandon traditional banks. Nor have the fintechs been able to create new financial infrastructures, or a new ecosystem. What they have done is to skillfully adapt to the infrastructures that already existed.

Does all this carping about the fintech companies mean that the report sees an easy road ahead for traditional banking? Not at all. “The stepped-up pace of innovation implies that for financial institutions, it is key to have an agile business model that is capable of quickly coming to agreements. None of those two qualities is a traditional strength of the finance industry,” the report says. However, that is changing, as seen in the process of transformation of banking institutions around the world.

The changes that are already taking place

The change in the rules is already a reality of the financial game, although fintech companies continue to have a secondary role when they compete in it. Specifically, the study identifies up to eight transformations in the sector that are the direct result of the fintech companies. Some of these changes are counter-intuitive: in a supposedly globalized world, the fintechs are provoking a financial regionalization (with three poles: Europe, the United States and China), given the absence of a global model and regulation.

Big changes are also taking place in the distribution of financial products. The distributors are gaining power (for example, the advantage that Apple Store has when it places certain applications in privileged places), while platforms such as Webank, the online-only bank launched by China’s social network and gaming company Tencent, are establishing themselves as a key option, due to their ability to connect the consumer to different financial institutions through a single channel.

The courageous thing is to go back to what one said a couple of years ago to see when you were right or wrong.

Many of the changes will come directly from the application of new technologies. In banks, the personnel will be comprised of both people and robots, and they will have their own assistants with Artificial Intelligence, such as Apple’s Siri or Amazon’s Alexa. Data will become increasingly important in the business model, and for that reason, banks will constantly update their applications, as Facebook does, to capture more and better data on its users.

In addition, financial institutions will increasingly turn to the big technology firms to develop their processes and to take better advantage of the possibilities of artificial intelligence. The study stresses that a company as removed from finance as Amazon Web Services is becoming “the backbone of the ecosystem of financial services.”

The analysis of what was forecast and these new predictions point in the same direction: technology is already a key driver of financial services and traditional institutions can continue to be leaders if they adapt themselves to it. As for the fintech firms, they have a recognized merit for transforming the sector, but that doesn´t mean they have even one iota more of the business. Theyll have to earn it for themselves, in an enormously competitive environment.