The danger of viewing fintech as over-hyped: Q&A with Deloitte's Joel Lipman
Digital disruption is a hot topic with many commentators suggesting that new technologies will soon over-shadow traditional methods. New research from Deloitte however finds fintech actually hasn't established itself as a significant player in the industry. Not yet, anyway.
Industry Moves speaks with Deloitte digital technologies and innovation expert, Joel Lipman, who talks us through the report's findings, highlighting uncertainties and discussing the ways in which fintechs may partner with incumbents in the future. He says that while there is significant potential for disruption there are still barriers that need to be addressed before we'll see fintechs take a sizeable chunk of the market share.
Q&A with Deloitte's Joel Lipman
Can you talk us through the data collection process for this report?
The data was collected from the forum's financial services, innovation and technology communities, academia and the public sector, involving 150 outreach interviews and 10 international workshops. Senior leaders from global financial institutions also provided guidance, oversight and thought leadership as members of the Steering Committee.
This is the final instalment of the project that we've been running since we issued our first report in 2015. The process involved engaging global leaders in a series of workshops to build a consensus of what we're seeing at a global level and to look at a combination of various trends. It was about bringing together the driving forces of financial services, being the regulators, the incumbents (large banks, insurers and wealth managers) and emerging technology disruptors, to discuss these trends and look at what has and has not played out.
In your opinion, what has been the most interesting aspect to come out of this three-year long research process?
The part that I liked the most was the research method of bringing together those three forces to debate what the future of fintech looks like. That was a very interesting process. There were two parts in particular that were of interest to me. The first being when we tried to identify the key disruption areas that were occurring across the 6-8 sectors of financial services. Seeing that consolidated view was very helpful for organisations to understand the types of disruptions that are going to occur and how they can be connected, yet differ, across the sectors.
I also think it's really interesting to look at how our new data reflects against our first report from 2015. In that report we looked at the fact that disruption would most likely occur at the intersection of customer friction and large pools of profit. We predicted this from the beginning and this new report is a reflection that this has happened and is likely to continue.
The final point of interest for me was identifying what role fintech has already played, seeing what they have already disrupted and looking at why they haven't yet lived up to their full potential in some areas. There certainly will be more to come!
The report found that while Fintechs have changed how financial services are structured and consumed, they have not yet successfully established themselves as dominant players. What are the key reasons for this?
There were two main reasons for this. The first being customer willingness, or in a single word 'trust', to engage with a brand they may not be that familiar with. It's their money and they might not feel confident to shift it away from a familiar incumbent. Customer willingness plays a key part in allowing the fintech disruptors to attract market scale and that's where the fintechs have struggled.
The first wave of disruption was all about trying to upstage the banks or other incumbents, to try and take the market share. That part hasn't played out for them, mainly due to the trust concerns some customers hold towards fintechs.
The second reason that they haven't become a dominant player at this stage, is that there was an under estimation of the barriers to entry. Regulatory barriers are there for a reason and I think there were some people, at the beginning of the fintech wave, that didn't anticipate the level of friction, or barriers, that they would encounter. These infrastructure barriers have slowed fintechs down a lot. They have had to instead partner with established institutions, such as banks, to access the necessary brand and scale.
How do you see these partnerships evolving into the future?
There will be a dual strategy, one of partnering and one of protection. We did predict this in our initial report from 2015. If we continue with the trend of moving to platforms and to the Could, I think it will be easier for fintechs, I think those two trends will make it easier for fintechs to be able to establish both customer trust and access to infrastructure.
If we take a platform view of financial services, meaning that you no longer get your services from a single institution but from many, and if there was a platform that you trusted, for example Apple's I-tunes store, there can then be applications that you pull from that platform, moving into a model that will create more direct to market opportunities for fintechs. What we will continue to see is banks, and other financial institutions, leveraging fintechs for their own internal acceleration and capabilities.
The report mentioned that some organisations, such as super funds or dealer groups, may become reliant on large tech companies as advancements in technology become more sophisticated. Apart from cost increases, how could this pose a threat to the organisations?
They can become not just a provider of infrastructure but also a competitor. We see it in other markets globally; Google offering insurance, Amazon offering lending services for small businesses. What is that going to mean? There's an element that will come from tech companies that are providing infrastructure and core services. They could eventually become competitors. If we look at the failings of fintechs as discussed before, around customer willingness and lack of infrastructure, these are things that large tech companies already cover and so can potentially move beyond.
People aren't concerned about Apple as a brand, they're comfortable to make payments through that platform. If that is a continued trend, what other financial services could those technology brands offer that consumers would feel comfortable to adopt? While there is still uncertainty around this, it's something that could eventually play out.
What were the main uncertainties that you uncovered for the investment management sector?
There were some key trends and uncertainties for this sector. What we see in investment management is that there is quite a unique separation between those that manufacture the product and those that distribute the product. So, does establishing new channels, like robo-advice, allow the manufacturers to now look at establishing methods of distribution themselves?
We're seeing large manufacturers, the likes of BlackRock, Vanguard and other key players that have created lots of products and have sold those products through distributors and various advisers, now looking at direct to consumer distribution models.
The second uncertainty was looking at the impact of robo advisers and the uptake of consumers who are willing to use digital channels to help them with various forms of advice. You have to think about the role that's going to play on the wealth managers and advisers. It will be interesting to see how they differentiate themselves, looking at the value of a human adviser versus an online tool.
When looking at the evolution of the role of human advisers we note that they still have a role to play, but now it's about understanding what that role might be. This is especially so when combined with the rise in low cost platforms which lend themselves towards digital servicing, because the lower cost doesn't give them the ability to surge through high cost channels like a human advice channel.
The report does outline additional concerns, but for me those would be the main points of uncertainty when looking at the bigger investment management picture.
...and how does this play out in an Australian context?
We see the concerns that are outlined above within an Australian context quite clearly, whether that be the roles that the banks are playing, or the uncertainty around the role of wealth managers or super funds.
Super funds are asking the same question about distribution: How do they best distribute? What's the role of advice for them when building out advice channels? Do they look at using their own platforms and products around investments as well as non-superannuation investment style products? We can clearly see these questions playing out in an Australian context and the report takes this to global lengths.
Since releasing the first 2015 report 'The Future of Financial Services',, what do you feel has been the biggest change/disruptor to the finance industry?
It's hard to answer that question and not to look at it sector by sector. But if I was to pick the major things that I think have changed and have made an impact I would say that the rise of digital as a distribution channel has been significant.
In Australia we have been ahead of many markets, certainly post GFC when our financial system remained relatively unscathed and we were able to develop digital channels of significance. Many of the large global players were looking at Australia and saying, "Wow, you guys are really ahead," and to a point we still are.
The way in which we use data, beyond traditional forms, has been significant too. Whether it is looking at different forms of credit or different models of insurance.
My third point would be around the development of early forms of artificial intelligence and in its current form around algorithms used to create customer experiences or personalised/ predictive models and then moving towards high levels of artificial intelligence. That's starting to gain big momentum and is playing out across various sectors.
Anything that you'd like to add?
There could be a view that when you read the report it comes across as if fintechs have been over-hyped and have undelivered. But that's a dangerous view. What we are saying is that it hasn't delivered yet. There is still significant potential for disruption. It's not as if disruption will ever be over and you can just get back to business. We believe disruption is a continuous event, it's not just a period of time.
You can download the full version of the 'Beyond Fintech: A pragmatic assessment of disruptive potential in financial services' here.
