On 14 February, rather than celebrating Valentine's Day, the Financial Stability Board (FSB) published a report in which it considered the impact of technological innovations on the market structure of financial services.
The FSB agrees that technological innovation holds great promise for the provision of financial services, with the potential to increase market access, the range of product offerings and convenience while also lowering costs to clients.
One of the key considerations of the FSB’s analysis was to consider the impact BigTech and FinTech firms are having on incumbent financial institutions. The FSB notes that, to date, the relationship between FinTech firms and incumbent financial institutions appears to be largely complementary and cooperative in nature. This is because FinTech firms, generally, do not have sufficient access to low-cost funding or the customer base necessary to pose a serious competitive threat to established financial institutions.
Alternatively, the FSB considers that the competitive impact of BigTech firms may be greater than that of FinTech firms. This is because they tend to have large, established customer networks and enjoy brand recognition and trust. Think about it! Would you apply for a credit card with Amazon or opt for a company that you have never heard of!
Additionally, in many cases, BigTech firms could use proprietary customer data generated through other services such as social media to help tailor their offerings to customers’ preferences. This, combined with strong financial positions and access to low-cost capital means BigTech firms could achieve scale very quickly in financial services.
The Chinese financial services market provides the prime example for the FSB’s suggestion of the power of BigTech firms. In China, the financial services sector has been taking a “TechFin” approach rather than a strictly FinTech one. In other words, it is about technology, which just happens to be applied to one’s financial life.
Chinese BigTech firms, in particular, Alibaba, Tencent and Baidu, offer customers a range of financial service products. They are all involved in offering payment services, lending and short-term credit, current accounts and insurance to their customers. The former two are even involved in asset management services.
What Alibaba, Tencent and Baidu have been able to do is change consumer expectations about where and how financial services ought to be delivered and the financial services market in China has evolved as a result of this.
So what does the future of financial services look like? Here come the millennials!
With a shift in regulation towards Open Banking, facilitated by technological innovation and the digital nativity of millennials, I believe that it is the prime time for BigTech firms to offer financial products and services that are simpler, clearer, cheaper and easier to use. So watch this space!
BigTech’s competitive impact on financial institutions may be greater than that of FinTech