NASTASSIA ARENDSE: We are looking at what’s happening in the fintech space. The World Economic Forum launched a report that looks at the state of innovation in banking and insurance.
I’m speaking to Jesse McWaters, who is the project lead of disruptive innovation in financial services at the World Economic Forum. He has co-authored a report that looks at the state of fintechs, and how it seems that the dominant companies are now taking a leap forward ahead of some of the disruptive fintech companies that have come on board.
Jesse, thank you so much for your time
Take me through your report.
JESSE McWATERS: We’ve been looking for the last two years at how technology is transforming financial services, and specifically looking to bring together both senior executives from the big banks and insurers with some of the new and excelling fintechs.
I think that there are three things that we’ve found that are particularly interesting. The first is that while fintechs have really changed the question of what it takes to be competitive in finance, they’ve changed the competitive dynamics, they haven’t changed the financial landscape, which is to say that they haven’t really been successful at unseating the big banks.
The second thing that we are seeing is that it’s in a sense becoming more and more of a big-tech, not about fintech, that the things that large banks and insurers need to be good at – like having flexible cloud-based architecture, like leveraging AI and indeed analytics – are increasingly things that large-tech firms are really good at, and you are seeing banks and insurers to become and more dependent on those type of firms.
And then the…thing that we saw is that we saw is we saw that there’s and a sort of regionalisation occurring in financial services. You might be inclined to assume that technology is making our financial experiences more and more similar, when in fact the opposite is the case.
In China you have this…model of financial services. In the United States it’s fully bank-led. Europe is building an almost hybrid model. And in emerging economies it’s really uncertain which, if any, of these they are going to follow.
NASTASSIA ARENDSE: On the back of your comments about how the fintechs have changed, how financial services are structured but have not successfully established themselves as dominant players, where in that have the fintechs fallen short?
JESSE McWATERS: I think the real critical challenge has been overcoming switching costs. So, people have liked the things that fintechs are offering. They don’t need to apply a loan in the middle of the night. The ability to have a robot advisor helps to allocate your portfolio if you don’t want to spend the fees associated with in-person consultations. But what they haven’t wanted to do necessarily is to switch to another provider. And so what you’ve seen is when large banks, insurers and asset managers have copied the offerings of fintechs, or have bought an integrated fintech capability, they’ve been hugely successful. Or when fintechs have been tempted to stay alive by stealing clients from incumbents, they been much less successful.
NASTASSIA ARENDSE: In terms of the disruptive forces that you’ve identified, I think you’ve put together about eight of them that have the potential to shift the competitive landscape of the financial ecosystem. Which one of those have you mentioned?
JESSE McWATERS: I think that one of the most interesting and important of those is the shift to…based models of distribution. If you think about the way that financial services has traditionally been organised, it’s really …, and that’s within a single institution, and with that single institution providing most of your products. A bank is responsible for both creation, the distribution and the servicing of financial products and it provides many of them. For most people that acts a one-stop shop.
Increasingly in markets like China and Europe, we are seeing a transition away from that model to a model that looks a lot more like Amazon, almost, where a platform provides you the opportunity to pick and choose financial products, to compare their properties and to receive recommendations. And that’s really a significant shift for traditional financial institutions who aren’t used to collaborating with other partners in an ecosystem, and who are used to often bundling or cross-selling products in order to achieve higher margins.
NASTASSIA ARENDSE: With the arrival of new technologies such as artificial intelligence, where are you seeing the major shifts in financial institutions?
JESSE McWATERS: I think we are seeing AI impact financial institutions in at least four ways. The first is that we are seeing them try to use it as a new way to either increase the efficiency of, or to augment customer interactions, so lots of people trying right now to integrate with services like Amazon, … or …, to give new points and interactions with customers.
We are seeing a lot of advanced analytics being used in decisioning, deciding whether or not we should get a loan, for example.
And then we are also seeing the technologies being used to do things like improve security and increase the efficiency of the organisation.
And then over the top of those three things, you also have AI being used in more strategic ways for the institutions, helping executives make decisions, understand risks in the broader macro economy. And I think that’ll be one of the most interesting ways in which financial institutions will use AI to differentiate themselves.
NASTASSIA ARENDSE: All right, Jesse, we’ll have to leave it there. Thank you so much for your time.