Twenty years ago, if you wanted to take a vacation, you visited a travel agent to explore your options and make your arrangements.
But when websites like Expedia and Travelocity made those services available at the click of a mouse on a computer in the comfort of your own home, the travel industry was forever changed.
That’s the crossroads currently facing banks and other stalwarts of the financial services industry as fintech companies, or companies that use software to provide financial services to customers, are starting to disrupt consumer lending as we know it, according to a new report by the World Economic Forum.
The report, “The Future of Financial Services: How Disruptive Innovations Are Reshaping the Way Financial Services Are Structured, Provisioned and Consumed,” examines how new technology startups are changing the financial services industry, and how these disparate players can actually work together to better serve the needs of customers.
The Switzerland-based think tank that engages political, business, academic and other leaders of society in collaborative efforts to shape global, regional and industry agendas in the spirit of global citizenship spent a year and a half examining the emergence of fintech and interviewed more than 100 industry experts and executives from global financial institutions such as UBS, HSBC, Deutsche Bank, Barclays, Visa and MasterCard, as well as leading global fintech innovators such as Zopa, Funding Circle, Transferwise and Ripple.
Until now, there has been no comprehensive understanding of the state of disruptive innovation in the financial services sector. The forum’s report set out to understand which innovations are most relevant, how emerging innovations have evolved and how these innovations will impact existing models.
Because fintech is so new, there is “significant uncertainty for traditional players as they strive to react to growing competitive pressures,” the report states.
“For decades, banks and insurers have employed similar, highly profitable business models. But they realize an Uber moment may finally be coming to their sector,” said R. Jesse McWaters, lead author of the report.
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“Financial technology companies are deploying online platforms, have small capital bases, and make strategic use of data to acquire customers and revenues at a fast pace. Banks and insurers noted that, and are contemplating their response.”
Here’s what we do know about fintech: These companies have leveraged the customer’s use of constant connectivity and automation to swiftly resolve what have traditionally been pain points. In recent years, we’ve seen an explosion in the number of new companies that offer innovative solutions to a particular area of inefficiency, unlike banks that historically have wanted to provide a full customer experience, rather than a niche one.
For example, technology companies like Google and Amazon have raised customer expectations for digital experiences, posing a new challenge for traditional financial institutions. This has led to public antipathy toward banks and insurers, combined with high levels of trust enjoyed by many tech firms.
“Many new entrants have shown they can harness their focused innovations to ‘skim the cream’ from financial institutions’ operations in the short term,” the report states.
What we don’t know is what this means for lenders in the short term. But although this has traditional players concerned, it doesn’t necessarily represent a terminal threat, the forum noted.
A page from the World Economic Forum’s report.
“As new entrants grow, they will face the kind of challenges that are encountered by many successful innovators: a crowded market, lack of scope to go beyond their initial target niche and the constant risk of sinking before they can swim,” the forum stated.
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“They will also have to face up to the challenges that inhibit traditional institutions today, from increased regulatory scrutiny to increased operational complexity. These innovations must therefore be assessed for their long-term impact on financial services firms — and their potential to generate not just threats, but also opportunities.”
In fact, the forum suggested that traditional financial services companies work together with fintech companies “to offer best in-kind services” that address customer choice.
“Innovators can use partnerships with bigger rivals to ensure their ideas are implemented at scale and become widely accessible to consumers,” the forum stated, adding that “some already have.”
According to the report, new entrants can use collaboration with established firms to integrate themselves into the existing value chain, while major players gain through slicker, streamlined processes and potentially through reputational benefits.
Any companies that fail to embrace collaboration may be left behind, the report suggested.
“It should be clear to incumbents that refusing to rethink their role in the wider financial ecosystem could result in business failure. This fate will inevitably befall a small number of firms, just as a certain number of failures must be expected in any efficient marketplace. But it’s a mistake to think that most traditional financial institutions are too intransigent to survive — or even to thrive — in their future environs.”
The report doesn’t mention mortgage lending specifically, but other organizations and economists have been keeping an eye on fintech startups that are offering mortgage services. Earlier this year, Forbes named several mortgage-related companies in its list of “15 Fintech Startups to Watch In 2015.” The list included companies such as Planwise, a free listing platform geared toward affiliated brokers and lenders.
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