Notably, while all these sectors are currently core or near-core business for incumbent, diversified banks, no fintech or start-up covers multiple business lines.
The threat from Big Tech as opposed to fintech comes from a different flank. Like major banks, these firms have the capacity to invest in or hoover up multiple start-ups – or indeed, as is the case with Amazon, buy banks.
This is the front the WEF report focusses on. The WEF analysis makes the point fintechs themselves don’t have the scale to influence markets.
“While financial technology firms have been driving innovation and inspiring others, they have also been failing to capture significant market share,” it says. The tech giants have scale.
In the anglophone world and western economies we tend to focus on the FANGs – Facebook, Amazon, Netflix, Google – and their like but the WEF reminds us the Chinese influence is potentially even greater.
Chinese tech giant Tencent's Webank platform, which allows retail customers to purchase products from multiple competing credit and asset management providers, is the digital equivalent of a universal bank – but even more universal.
Jack Ma's Alibaba group via its Alipay mobile payment app – based around QR code technology almost forgotten in the west - now owns over 50 per cent of the $US5.5 trillion Chinese mobile payments sector.
A contributing expert to the WEF report, the payment doyen Chris Skinner, makes the point “fintech hasn’t changed much … yet”.
The point is fintechs represent only the first wave in a series of disruptive forces that will likely shape the future of the industry.
“Fintechs have changed the pace of innovation and reshaped customer expectations across the financial services ecosystem, laying the foundation for future disruption in the industry,” said Rob Galaski, partner, Americas FSI Regional Leader, Deloitte Canada, a co-author of the WEF report.
“The success of fintechs in changing the basis of competition, as well as the increasing pace of technology, means that incumbents have the potential to improve rapidly - but also face rapid disruption going forward.”
WEF identified some key fronts for disruption: platforms which provide consumers with multiple banking options, likely building on open data; greater regionalisation – echoing the broader anti-globalisation mood, demanding more national models and making it harder for fintechs to go across borders; greater dependence by banks on Big Tech – for example cloud-based infrastructure – even as those enterprises become greater competitors.
Of what there can be no doubt is financial services is being radically transformed. The tech challenge is but one dimension.
Banks have benefitted from a three decade bull run for bonds – and banks make more money as interest rates fall. Equally banks were delivering returns on equity in the 20s before the financial crisis when the risk free rate of return was about a quarter of that.
While today the risk-free rate is miniscule, globally banks struggle to post ROEs in the double digits. Hence there is enormous pressure to reduce costs. New revenue streams of course would be welcome but the pressure on costs and customer ownership is paramount.
Those who own the customer – or, more to the point, those with whom consumers choose to have a primary relationship – will have higher margins than those just providing back-end services or product manufacturing.
As the WEF report says: “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 minimize engagement to protect independence.”