Incumbent banks are concerned that FinTech startups will start to eat into their business, a new study finds. A loss of market share and pressure on margins are the two biggest areas of threat: well over 80% believe that up to 20% of their business might be lost to FinTech companies in the next five years. Working together is becoming an ever more exciting option, although IT security, regulatory uncertainty and cultural differences create barriers.
Financial technology (FinTech) pose a host of risks to incumbent retail financial services institutions, across a diverse field of products and services. A recent Capgemini study found that the tech giants and incumbent competitors posed the biggest risk to leveraging FinTech technology in a way unfavourable to incumbent, although FinTech startups too were found to pose risks for the industry.
In a new report, titled ‘Customers in the spotlight How FinTech is reshaping banking ‘, PwC considers the effects that FinTech startups are likely to have on consumer banking over the coming five years. The report is developed from the opinions of 544 financial service respondents, principally CEOs, Heads of Innovation, CIOs and top management, from 46 countries.
Rise of FinTech
The research suggests that respondents (73%) believe that disruption, to the traditional stability within the consumer banking segment, is likely to start to affect incumbent institutions over the coming years, particularly on the back of changing expectations from customers.
One area which respondents are particularly concerned about is customer relationships; FinTechs are often able to leverage agility and targeted solutions to meet the needs and expectations from customers, which make their respective propositions more attractive than those of incumbents. As it stands, while 75% of respondents says that increased focus on the customer is the most important area of impact, only 53% of respondents considers themselves to be customer-centric. 80% of FinTechs on the other hand, believe that they are able to deliver customer-centric products and services.
In terms of the effects of FinTech companies on incumbent banks, a loss of market share is of greatest concern, cited by 70% of banking respondents vs. 50% of respondents from all financial sectors to a similar question. Pressure on margins came second, at around 67% of respondents, also slightly above that of all sectors. Information security/privacy threat came third, at around 60% of respondents concerned. Around 50% of respondents expects customer churn to increase from FinTech within their industry.
In terms of the level of threat to bank incumbents’ business from standalone FinTech players, well over 80% of respondents rated it at between 1-20%, while around 40% said that a standalone FinTech player could take between 21-40% of their business. A smaller 20% thought that up to 41-60% of their business was at risk. A good 40% of respondents said that they do not know the full risks, with very few – around 10% – thinking that there is no risk at all to their current business model.
Respondents were also asked about how they were reacting to the various types of startups’ propositions (e.g., by investment, partnerships, etc), as well as their relative importance. Retail banks, seeking to streamline operations and reduce costs, placed ways of ‘improving and simplifying operations’ as the most important, while the rate of response to the trend came shared second – mitigations might include engaging with FinTech startups that offer open development and Software-as-a-Service (SaaS) solutions for banks. Banks also see the move to nonphysical and virtual channels as important, which also garners the most response from retails banks – responses include banks offering APIs that allows for the easy integration of third party apps and digital banking solutions.
'Reaching, retaining and engaging customers' came third, with retail banking respondents finding such solutions both important and response worthy. The simplification of product application processes was seen as the third most important trend in the industry. A number of other trends, including reaching the unbanked – which has considerable FinTech startup activity – as well as enhancing credit underwriting, are both seen as areas of relative importance to banks and are gaining at least some attention.
One area in which FinTech activity is very strong, but where incumbents are as of yet not responding, is the rise of peer-to-peer lending – which last year saw £2.4 billion in activity. Crowdfunding propositions, while not unimportant, has seen little activity from respondents.
The survey found that collaboration between FinTechs and incumbent banks is relatively robust, with banks already engaging in joint partnerships. A number of issues exist between the two parties, however. Incumbent banks have concerns (almost 60% of respondents) of the IT security of startups, while only 30% of FinTechs worry about the IT security of banks. Incumbent banks are also concerned (55%) about regulatory conditions related to what FinTechs are up to. FinTechs on the other hand, are the most concerned about differences in management & culture between them and their bank partner, as cited by more than 50% of respondents, while almost 50% are concerned about differences in operational processes.
Manoj Kashyap, PwC’s Global FinTech leader, says, “Customers want convenience, personalisation, accessibility and ease of use. To live up to these expectations, banks and FinTechs should focus on opportunities that leverage each other's strengths, whether in product design and development by start-ups, or distribution and infrastructure capabilities by banks. FinTechs are great at offering product simplicity and seamless integration, but they lack the proper IT security and regulatory certainty that banks have. We see both sides coming to the realisation of a new, mutually beneficial relationship and it’s ultimately the customer who will benefit the most from this.”