A recent report from Accenture asks “Fintech – Did Someone Cancel the Revolution?” The report notes that the promise of Fintech startups to change market structure, radically improve products, and disrupt incumbent financial firms has not yet come to pass.

This question comes in the wake of a decline in new Fintech startup formation. Per Figure 1, the number of Fintech startups in the US and Europe has declined rapidly since 2015 after several years of steady growth.

Figure 1: Where Are the Fintech Startups Going?

Sources: Atlas

The Accenture report misses a key point. The Fintech revolution hasn’t been cancelled, it’s been co-opted. Startups that once aimed to disrupt big financial firms now partner with them. Many Fintech startups count incumbent firms among their key investors or have been directly acquired by them. Startup formation has slowed because some of the technological innovation is moving in-house.

Naturally, the bureaucracy and inertia of big financial institutions will tend to slow down the pace of Fintech-driven change. Ultimately, though, the co-option of the Fintech revolution will not diminish the scope of its impact. The technology exists to disrupt the financial value chain in the way Fintechs promised. Large incumbent financial firms will continue to control the bulk of the value in the industry, but the structure of the value chain and the way these firms compete will change drastically.

How The Revolution Will Play Out: Changing How Big Banks Compete

Many leaders in the financial industry already understand the new competitive landscape. From UBS Group (UBS) CEO Sergio Ermotti in a recent interview with Bloomberg:

“I’m totally convinced that the battleground of banking is not the front office. The battleground is the back end. There’s no understandable reason why the financial-services industry has not developed a more comprehensive sharing of the value chain.”

Financial institutions used to integrate research and execution, with much of the back-end work such as data-gathering modularized and outsourced. The vast majority of the value came from the execution of transactions, so all the back-end work was done with the aim of encouraging more trading. New technologies have already begun to disrupt this value chain, and regulations such as MiFID II will make it even more difficult to capture value by bundling services on the customer-facing side.