World Economic Forum: Beyond Fintech

30 August 2017 in THE BOND MARKET by Tim Binnington

BEYOND FINTECH: A PRAGMATIC ASSESSMENT OF DISRUPTIVE POTENTIAL IN FINANCIAL SERVICES

The World Economic Forum, building on the findings of their 2015 report “The Future of Financial Services,” has produced a new report considering the evolution and impact of fintech firms on financial services to date and presents a series of contrasting outlooks for the future of the industry.

For years Fintech has been the hottest topic of discussion in financial services, with incumbents, regulators, and consumers all asking the same question: “Will small technology-enabled ‘fintech’ start-ups redefine the way that banks and insurers operate, and upend the competitive landscape of the industry?”.

Click here to download the full report.

Click here to visit the World Economic Forum site.

The report suggest that fintechs have materially changed the basis of competition in financial services, but have not yet materially changed the competitive landscape. They play a critical role in defining the pace and direction of innovation across the sector but have struggled to overcome the scale advantages of large financial institutions.

Many fintechs have entered the trading platform area (23 new corporate bond platforms alone between 2010 and 2015), but a review of the survivors suggests that a mix of fintech technological innovation and incumbent scale is the winning bet.

The findings on market infrastructure include:

The role of platforms in capital markets is growing, if unevenly, but regulatory changes and new technology will influence their adoption and capabilities.

Traditional over‐the‐counter (OTC) products continue their journey towards electronification, driven by regulation and the promise of improved economies of scale.

The efforts of electronic platforms to scale up are complicated by an uncertain and regionally fragmented regulatory environment and political instability.

Market infrastructure providers are disrupting themselves to preserve a pivotal role in future processes and unlock new revenue streams.

New market platforms have rarely challenged incumbents, and instead see joint ventures and partnerships as the most successful path to scaling up.

Algomi's work with Euronext to create Euronext Synapse is included as a case study of a successful initiative.

The key findings for financial institutions include:

INSUFFICIENCY OF TECHNOLOGY ALONE
New technological solutions alone are insufficient to enable the creation of new market infrastructure or to drive significant changes in existing infrastructure; this will make “minimum viable ecosystems” of cooperating stakeholders critical to development. Leading players from both the public and private sphere will seek to actively participate in and shape the direction of these stakeholder groups.

NAVIGATING REGULATORY UNCERTAINTY
Differing regulatory direction around the world will likely lead to both regionalization and uncertainty in the short and medium term. Financial institutions will need to develop the flexibility to rapidly adapt to both large‐scale regulatory changes and regionally divergent regulatory treatment of emerging‐market infrastructure technologies.

NEW VALUE CHAIN PRESSURES AND OPPORTUNITIES
Regulation and technological advancements are driving efficiencies, which will put pressure on incumbents to consolidate their positions and thus shorten the value chain. Forward‐looking firms will seek to position themselves in areas that will continue to add value, including areas currently occupied by other firms.