Despite concerns that financial technology start-ups are luring away customers, the World Economic Forum has warned that Tech Titans such as Google, Facebook, and Amazon pose a greater threat to banks than the said start-ups.
Amid concerns that traditional banks could lose customers to more accessible and cheaper new players, the fintech sector, which is said to be worth around £7bn in the United Kingdom, has been a key area of focus for Bank of England Governor Mark Carney and Chancellor Philip Hammond this year.
However, World Economic Forum’s report recommends that the sector should be focusing its concerns elsewhere. It claims that start-ups have not attracted as much market share as expected while the current tech giants have invested money into areas including big data customer analytics, cloud computing, and artificial intelligence.
The report noted that financial institutions had become dependent on Google, Facebook, Amazon, and the like, for expertise instead of looking at these areas as a way to compete. For example, among the customers that use the cloud computing platform of Amazon are big firms including Carlyle and Aon. Also, Alexa, the tech giant’s voice-activated system, has attracted Liberty Mutual and Capital One.
Another example is Brazil’s Banco Bradesco which is using Facebook applications to attract customers by letting them perform day-to-day banking through the social networking site.
The paper also warned that there is a possibility that these Silicon Valley firms could one day decide to introduce services in direct competition with the banks and insurers even though the partnerships are presently working in favour of both sides.
The study’s lead author, Jesse McWaters, said that “the partnership between banks and large tech companies risks not staying a reciprocal one”. She also stated that “Financial institutions increasingly rely on technology firms for their most strategically sensitive capabilities, but can so far only offer their ongoing business in return.”
McWaters also said that these technology companies – some of the world’s best-known businesses – would be “able to pick and choose their points of entry into financial services” unlike fintech firms which have to develop brands from scratch. She added that these companies could also take advantage of the dependence of incumbent institutions on them.
She also added that “financial institutions will likely need to walk a challenging line between capitalising on the services of large technology players and becoming dependent on them.”
The report also included that peer-to-peer lenders, robot advisers, and many other fintech companies, have become successful in shaking up corners of the market, the rapid response and high customer switching costs of current institutions have challenged their capability to grow.
British banks have been disturbed about these technology giants’ competitive threats for so long that many are increasing their technology budgets or launching their own technology incubators in response.