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They say dreams do come true, but in the case of financial technology firms popularly known as fintechs, the dream of taking over the mantle of leadership in financial services industry may take a lot longer – that is if it ever yields true.
Researchers at World Economic Forum in a new report, believes that the early promises shown by small technology-enabled may have found its equilibrium or stalled as traditional institutions begin to respond to the threat. In so doing, many fintech firms which currently are struggling with scale and customer adoption is increasingly being compelled to seek partnership to survive.
The need for partnerships has to a large extent worked in the favour of fintech. The researchers found that fintechs have seized the initiative – defining the direction, shape and pace of innovation across almost every subsector of financial services – and have succeeded as both stand-alone businesses and crucial parts of financial value chains.
Similarly, fintechs have reshaped customer expectations, setting new and higher bars for user experience. By engendering like loan adjudication, fintechs have shown that the customer experience bar set by large technology firms, such as Apple and Google, can be met in financial services.
Interestingly, fintechs in Nigeria have had several collaborations with the two technology firms which in one or the other have rubbed off on their innovative products.
The fintech advantage is however challenged by the unwillingness of customers to switch away from traditional financial service providers has not been as rapid as expected. For one, the WEF researchers noted, customer switching cost seem very high, and new innovations may not be sufficiently material to warrant the shift to a new provider, especially as incumbents adapt.
Secondly, fintech have struggled to create new infrastructure and establish new financial services ecosystems, such as alternative payment rails or alternative capital markets. They have been much more successful in making improvements within traditional ecosystems and infrastructure.
Despite the failure to disrupt the competitive landscape, fintechs however have laid the foundation for future disruption. WEF researchers believe that the success of fintechs in changing the basis of competition, as well as increasing pace of technology, means that while financial institutions have the potential to improve rapidly, they face rapid disruption both now and in the future.
This is very evident in Nigeria’s financial services landscape where mainstream players have gone full throttle in fintech innovations. In the bid to position their business for future disruption, they are poaching fintech talents, creating new innovation departments and also sponsoring major innovative researches.
WEF notes that the rapid growth of the fintech ecosystem allows firms to externalize parts of their innovation function, as they wait and see which new offerings gain traction before deploying their own solutions.
“The proliferation of fintechs provides financial institutions with a “supermarket” for capabilities, allowing them to use acquisitions and partnerships to rapidly deploy new offerings.
The rate of change however does present some concerns.
The tempo of innovation in financial services, for instance, could signal that a financial institution’s success is predicated on business model agility and the ability to rapidly deploy partnerships, neither of which are the traditional core competencies of the institutions.
It should also be said that the ability to shop the fintech landscape for capabilities is not limited to incumbent institutions; today new entrants face significantly lower technological barriers to entering financial services, with potential long-term implications for the competitive landscape.
The researchers outlined eight forces with the potential to shift the competitive landscape of the financial ecosystem.
One of the eight forces is cost commoditization. Here financial institutions are expected to commoditise their cost bases, removing them as points of competition and creating new grounds for differentiation. Profit redistribution is another force which requires technology and new partnerships to enable organisations to bypass traditional value chains, thereby redistributing profit pools.
Other forces include experience ownership in which power will transfer to the owner of the customer interface; platforms rising; data monetisation; bionic workforce; systemically important technology firms; and financial regionalisation.
Facing enormous pressure to reduce their cost, WEF says incumbent institutions have begun to identify with new technologies, as well as collaboration with long-time competitors and new entrants alike, in order to commoditise cost drivers that do not provide competitive differentiation.
They are also responding by experimenting with the creation of new utilities and the expansion of existing utilities’ role in order to standardise processes and avoid duplicating work between companies.
WEF researchers recommend that organisations must look at partnerships and ecosystem as a company-wide strategic focus. Organisations should also start thinking of security and permissions as a jigsaw – each “piece” will have to be treated separately to minimize the threat from any new external connection.
They also recommended that organisations need to improve tracking of data flows to protect users, as information is shared with external companies. Finally, they say incumbents need to differentiate their customer-facing processes, as middle and back offices become commoditise.
The role of regulators is to provide round-the-clock monitoring of utilities and business-to-business (B2B) service providers, and consider their potential systemic risks.
The role so far played by regulators like the Central Bank of Nigeria in creating policies that appear to provide a level playing field for players needs is positive. Nevertheless they must also monitor the shift in profit pools in order to identify the new value chain, as long-regulated companies become less relevant and new companies grow in importance.
Finally, regulators will have to guard against product distributors abusing their market power, especially in open platforms where distributors control the customer shopping experience. Questions about how distributors and manufacturers share liability will have far-reaching.
