White Papers

Fintech start-ups are driving innovation but failing to capture large market share in the financial services industry, according to a new report from the World Economic Forum (WEF).

The report, Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services, draws on interviews and workshops with hundreds of financial and technology experts, including Rob Palatnick, DTCC Managing Director and Chief Technology Architect, and Jennifer Peve, DTCC Executive Director, Office of Fintech Strategy.

DTCC’s initiative to re-platform its Trade Information Warehouse (TIW) with a cloud-based system that will leverage distributed ledger technology (DLT), was featured as a case study in the paper.

The paper considers 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.

Key findings from the report include:

• The competitive landscape in banking and insurance is being shaped increasingly by large technology firms supplying critical technology to the sector, opening the door to direct competition at a later stage.
• Meanwhile, regulatory approaches to financial innovation are diverging in the US, Europe and Asia, potentially jeopardizing the likelihood of a concerted global response in a future financial crisis.

"The impact of fintech on the post-trade environment could have far-reaching implications on market structure, regulation and the management of risk,” Palatnick said. “Because market infrastructures play a critical role in protecting the stability and integrity of the global financial system, DTCC has unique insight into the critical issues and considerations that must be taken into account.

“DTCC believes collaboration is essential to aligning fintech technologies with core industry principles, such as mitigating risk, enhancing operational performance and driving cost efficiencies,” he added, “and DTCC is proud and honored to have been part of this industry-wide collaborative effort to highlight the transformative role of fintechs on the financial services ecosystem.”

Critical Capabilities

The WEF report highlights cloud computing, customer-facing artificial intelligence and “big data” customer analytics as three capabilities that are becoming critical to the competitive differentiation of financial institutions.

The WEF findings echo those detailed in DTCC’s white paper, “Moving Financial Market Infrastructure to the Cloud.” In its paper, DTCC asserts that the combination of technology commoditization with the scale and competition from public cloud vendors is driving the unit price of computing, storage and network services toward zero.

While fintechs now define the tempo and direction of innovation in financial services, high customer switching costs and the rapid response of incumbents has challenged their ability to scale, said Rob Galaski, Partner, Americas FSI Regional Leader, Deloitte Canada, and co-author of the report.

“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 in a statement published by the WEF.

Regulatory Challenges

Another of the report’s findings notes the emergence of distinct financial systems in China, Europe and the United States, raising concerns for international regulatory coordination. The report observed that, in China, large technology companies like Ant Financial (a subsidiary of Alibaba) and Tencent (the parent company of WeChat) have emerged as leading providers of a range of financial services – a striking departure from the traditional bank-led model dominant in the United States.

“Fintech developments including DLT, cloud computing, robotics and artificial intelligence hold great potential to modernize the current post-trade process and streamline the siloed design of the financial industry infrastructure,” Palatnick said. “For market infrastructures, the key to realizing the benefits of fintech lies in collaborating with regulators and policy makers to ensure that mandates and compliance obligations are met.”