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Why Tech Giants are more Disruptive to Banks than Fintech Startups

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On Tuesday, the World Economic Forum released a 194-page report on Fintech disruption. According to the report, traditional economics and distribution models could be deeply disrupted by the drive towards platform banking models. The report, co-authored by Deloitte, has cited numerous case studies across the globe and concluded that tech giants will be real disrupters in the financial services industry, unlike fintech startups which have failed to achieve the scale.

A combination of data migration to the computer cloud and open banking regimes will attract global technology giants such as Amazon, Facebook and Google to create platforms for distributing financial services. As a result, incumbent banks will be forced to compete head-on to control customer relationships, otherwise, they may end up becoming mere suppliers of commoditized financial products.

According to Rob Galaski, co-author of the report and Canadian lead for financial services at Deloitte, fintechs have only changed the basis of competition in the financial services industry but not the competitive landscape. While fintechs are defining the temple and direction of innovation in the financial services sector, rapid responses by incumbents and high customer switching cost have neutralized their ability to cause real disruption.

Speaking at CNBC’s Closing Bell, Jesse McWaters, the financial innovation lead at the World Economic Forum, noted that fintech startups are making a significant impact in defining what the user experience of the future should be. For instance, OnDeck and Lending Club have defined what the lending experience should be and banks have quickly copied the models as effectively as possible.

Authors of the report interviewed experts in both financial and tech industry and found out that tech giants are much ahead of banks in the development of technologies such as big data analytics, artificial intelligence and cloud computing. The report singled out Google, Amazon and Facebook as the three dominant tech firms in these areas. Consequently, lenders have been turning to these and other tech corporations to provide the functions. A good example is Amazon Web Services which has attracted several financial institutions such as Capital One, Aon and Nasdaq to Amazon’s cloud computing business.

Galaski further notes that for large financial institutions, the ability to have many followers has proven to be very important. Agile incumbents are using the fintech ecosystem as a supermarket for capabilities; this makes the ability to rapidly form and nurture partnerships an important ingredient of bank’s competitive success.

The observations detailed in the World Economic Forum report are not isolated. Talking to CNBC, Brigid McDermott, IBM’s vice president for blockchain business development argued that some fintech startups lack a full understanding of the industry that they are trying to disrupt. They do not know the scope of the transactions involved in the $8-9 trillion banking industry.

Similarly, Daniel Döderlein, CEO of Norwegian fintech startup Auka has pointed out that smaller fintech startups specializing in specific niches do not have the marketing muscle, customer base or any financial traction. These are likely to be bought by larger players.

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