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Fintechs: a work in progress

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Predictions on the future of the financial services industry have come thick and fast in the past few years: fintechs were going to change the world and make traditional incumbents an irrelevance.

But a new report confirms what many have suspected for a while.

The fintech revolution isn’t progressing at anything like the speed previously imagined, and disruptors have not materially changed the landscape or established themselves as dominant players.

The report – called Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services – represents the culmination of three years’ research by the World Economic Forum (WEF), with support from Deloitte.

It does not deny the impact of fintechs, accepting they have seized the initiative across almost every subsector of financial services and are defining the direction, shape and pace of innovation.

They have succeeded as standalone businesses and as crucial parts of financial value chains –reshaping customer expectations along the way.

However, customer willingness to switch from incumbents has been overestimated, and fintechs have struggled to create new infrastructure and ecosystems.

“Many consumer-facing fintechs struggled to achieve scale in the face of high switching costs,” project leader and WEF Financial Innovation Lead Jesse McWaters says.

“Meanwhile, incumbent financial institutions were able to catch up faster than many expected, treating the proliferation of fintechs as a supermarket for capabilities and using them as acquisitions and partnerships to rapidly deploy new offerings.”

Deloitte Australia Financial Services Innovation Partner Joel Lipman says Australia is no different to the rest of the world.

Fintechs haven’t provided the impetus we first thought they would to change the competitive landscape, because they haven’t been able to convince customers to move away from incumbents,” he says. “Incumbents’ market scale and broad customer bases ensured they maintained their competitive advantage.”

The report says the first part of this decade signalled the start of major disruption in the insurance sector.

From sales to claims, insurers face pressure on all sides of the value chain, and new risks linked to changing lifestyles and technology have brought new insurance needs.

“Insurers are challenged by the rise of insurtechs and a structural transformation of their customer base, forcing them to adopt new technologies more quickly,” the report says.

Customers are buying insurance in new ways, choosing different channels such as online and mobile.

Many are buying micro-insurance, or insurance directly tied to a product. Insurtech startups are offering ever-smaller “slices” of insurance.

Developments such as self-driving cars and the sharing economy have started to shift the responsibility of insurance away from the insurer to distribution platforms and product manufacturers, creating new engagement models and forcing a shift in insurance design.

The lines between consumers and businesses are blurring, the report says, with the rise of the “prosumer”.

“As a result, insurers must shift their delineation between personal and commercial insurance to meet customer needs.”

The report says the number of connections between consumer and insurer has risen, but consumers do not yet feel comfortable volunteering their information.

“The insurance findings illustrate the scale of the challenges facing insurers.

“The value chain is under enormous pressure, and changes in purchasing patterns are forcing insurers to move away from the traditional ‘onesizefitsall’ model towards a flexible, customisable range of products.

“At the same time, insurers must change from being reactive to being proactive, with the rise of connected insurance and the need to monitor customer risk on an ongoing basis.”

While the all-encompassing fintech revolution has not yet materialised, the evolution of the industry is a challenge for insurers that cannot be underestimated.

Report co-author Rob Galaski, from Deloitte Canada, says fintechs have changed the pace of innovation and reshaped customer expectations.

“They have laid the foundation for future disruption in the industry and been successful in changing the basis of competition,” he says.

“This, together with the increasing pace of technology, means incumbents have the potential to improve rapidly – but also face rapid disruption ahead.”