Despite facing an onslaught of technologically-driven change “incumbents, not innovators, look poised to benefit” in the investment management game, a new World Economic Forum (WEF) report claims.
The WEF report, titled ‘Beyond fintech: a pragmatic assessment of disruptive potential in financial services’, says the last few years have seen some “profound changes to the investment management industry” as the rise of robo-advice, big-data analysis, and back-office automation took hold.
But while the fintech revolution could “fundamentally shift the industry’s course”, the establishment was not yet on the mat.
According to the WEF study, technology has proven disruptive in three links in the value chain: making “robo-distribution… the most compelling tool for customer engagement”; “scaling the delivery of investment advice” with automated, or outsourced, middle and back-office functions; and, driving consolidation as “low cost” product manufacturers seek scale.
However, the WEF report says: “New entrants to investment management have struggled to gain market share in the face of customer stickiness and high customer acquisition costs.”
For example, established fund providers such as Vanguard had rapidly overtaken US robo-advice start-ups such as Betterment and Wealthfront, the study says. As at the end of 2016 the two robo-disruptors collectively managed about US$11 billion, the study says, compared to the US$47 billion on the Vanguard Advisor platform and over US$12 billion accumulated on the Charles Schwab Intelligent Portfolio advice-bot.
In a statement, co-author of the WEF report, Rob Galaski, Deloitte Canada partner, said in the fintech race being “a fast follower has proven more important than being first for large financial institutions”.
“Agile incumbents have used the fintech ecosystem as a supermarket for capabilities, making the ability to nurture and rapidly form partnerships a critical ingredient to banks’ competitive success,” Galaski said.
Overall, the WEF report identifies “eight forces” that could upend established rules of play in the financial services industry, including:
- Cost commoditisation as institutions slash and burn back-office expenses via technology, partnerships or outsourcing;
- Profit redistribution where new tech-enabled services change links “within and between value chains” – for example, US-based firm, Stripe (which launched in NZ last month) opening up cost-effective online payments to a wider population of merchants;
- Rising platform power as multi-provider single distribution channels become “the dominant model for the delivery of financial services”;
- Institutions will need to become “hyper-scaled or hyper-focused” as they can “no longer rely on controlling both product manufacturing and distribution” in a world where the platform is king;
- Data strategies will become increasingly important as institutions look to monetise and manage client information;
- Artificial intelligence advances will require financial services firms to “manage labour and capital as a single set of capabilities”;
- Systemically important tech firms emerge as financial institutions increasingly lean on “and resemble” technology providers; and,
- Financial regionalisation as different parts of the world develop divergent regulatory and client strategies.
The WEF study says the financial establishment is more likely to be threatened by tech giants such as Amazon or Google than the flurry of fintech start-ups.
“Fintechs have changed the basis of competition in financial services, but not the competitive landscape” Galaski said in the statement. “Fintechs now define the tempo and direction of innovation in financial services, but high customer switching costs and the rapid response of incumbents has challenged their ability to scale.”