Computers and Technology


Despite the unprecedented growth of fintech startups and the perception of rapid innovation in the banking market, there is evidence that smaller startups are growing much more slowly than comparable companies in the past and that innovation in financial services is actually slow. It has slowed down. .

This is because the largest banks are leveraging proprietary information banking technology to achieve significant efficiency gains and respond to highly heterogeneous customer and business demands. The result is a widening gap in income per employee and a strengthening of the dominance of market leaders… or “superstar capitalism”.

The question is whether dominant financial institutions should be broken up or whether banking companies should be forced to share technology, data and knowledge as part of open platforms, as Amazon has created a separate business with its cloud technology. Is?


Dominance Of Market Leaders

In banking, and in virtually every industry, the largest companies have been able to invest in proprietary information systems to take advantage of market opportunities and increase the dominance of both existing competition and new entrants. This increase in dominance has reduced the risk of large banks being affected. According to Besson, “In a given industry, the probability of a top-ranked company (measured by sales) falling out of the top four over four years has dropped from 20 percent to about 10 percent.”

Increased investment in software enables the largest banks to leverage and leverage data and systems to build customized products and services at scale. This allows these financial institutions to respond to customer needs faster than competitors. This makes it increasingly difficult for established banking competitors to sustain and for new companies to gain the customer scale needed to disrupt the market. In cases where fintech companies can combine innovation and scale, large companies are in a financial position to acquire these companies.

According to Besson, “These proprietary systems enable large companies to handle complexity, handle more variety, handle more product features, target products to customers more precisely, And advertise and reach those customers more effectively.”

Finally, the proprietary systems of the largest banks generate higher total revenue for these companies and higher labor productivity than the competition. There is evidence that this efficiency creates an opportunity to pay more for talent at a time when demand is highest.

“There is a war for talent where big companies are not only hiring more talented people, but paying them more. They will pay 15%, 20% or 30% more for the same job.

– James Beason


Market Concentration Effect On Innovation

Like all industries, the banking industry also benefits from product and service innovation. There are arguments that small startups are more innovative than large existing organizations. If this is true, then overall, banking innovation is negatively impacted when large firms dominate the ecosystem. Research on innovation over the years supports the fact that both small and large firms are important to the innovation process, but that large firms often focus more on incremental and process innovation, while smaller firms on product innovation. Focuses.

The challenge, as mentioned above, is that the technology gap between large players and small startups and incumbents limits the ability of smaller players to scale and implement their innovations. In fact, research shows that it has become more difficult for smaller companies to achieve the level of scale needed to exit. Technology fragmentation also often limits the ability of smaller companies to provide learning opportunities for workers interested in upskilling using the latest technologies.


Compliance Favors The Big Players

The complexity of banking has increased significantly over the years. This complexity requires more regulation and increased costs of regulation for banking organizations. ias of all sizes.

One consequence of increased regulatory complexity and compliance costs is that a greater portion of these costs are fixed, and the burden becomes more significant as a percentage of costs for smaller financial firms.


An Open Platform Benefits Both Large And Small Banking Providers

The proprietary system has made the largest financial institutions more dominant than ever. That said, the needs of businesses and consumers still haven’t been met (as evidenced by the number of fintech companies entering the market). The political challenge is to find ways to promote competition and try to level the playing field to benefit society.

“If customers can take their data and make it easily portable to another platform, they can do a lot of things that they can’t do with the big banks. And I think that’s the frontier. May be where things need to be opened up in banking.”

– James Beason

One option is to market technology, data, hardware or knowledge Unbundling should be promoted. This has been done by companies as diverse as IBM (for software and hardware businesses) and Amazon (for AWS cloud services and distribution logistics). Beeson says: “Where proprietary software systems have slowed the diffusion of new technologies, segregation can accelerate diffusion, improving innovation, productivity and competitiveness.”

This does not mean that the largest financial firms are interested in unbundling their proprietary technology, data or knowledge without a “push” from the government. Although detailed customer insights offer a significant competitive advantage, most large banking organizations in the US are hesitant to adopt open banking, where data is accessible with standard APIs.

To level the playing field in banking, it may be necessary to provide incentives (positive or negative) for the diffusion of innovations and software banking technology.

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