Traditional banks looking to leverage FinTechs as innovation pathway

19 December 2016 Consultancy.uk

While nearly half of executives in financial services see FinTechs as a 'significant threat', three quarters believe that they at the same time offer opportunities for partnerships / collaboration. A pathway to innovation is regarded as the main driver for joining forces with FinTech players. 

Financial Technology (FinTech) has, in recent years, garnered considerable attention from an array of industry insiders; their potentially disruptive propositions causing concern as well as offering opportunities for traditional financial services industry incumbents.

In a new report from Capgemini Consulting and Linkedin, in collaboration with Efma, titled ‘World FinTech Report 2017’, the view of FinTechs from the perspective of key stakeholders is considered, as well as the kinds of relationships that are being developed between startups, incumbents and customers. The report is based on a survey of 8,000 financial services customers in 15 countries: Australia, Belgium, Canada, China, France, Hong Kong, India, Japan, Netherlands, Singapore, Spain, Turkey, US, UAE and UK; as well as a number of surveys of financial services industry executives.

Executives’ view of FinTech firms

The impact of FinTech on the financial services sector remains a key unknown, executives in the sector are relatively divided on how they will be affected by the propositions of startups. While most believe that FinTechs will have some impact, some believe that FinTechs are unlikely to be able to scale to affect incumbents with a proposition that cannot be easily replicated, while others suggest that they lack access to the kinds of capital required to become real threats. Others see them as niche players, with limited systematic impact, just cherry picking. Others believe disruption is on the horizon. Most FinTechs themselves, a recent report finds, expect that their propositions will not be world shaking.

The executives cite a number of areas in which the phenomenon of FinTech is creating opportunities and challenges for themselves, and their incumbents. One area is a springboard to innovation, through partnerships, 76.7% of respondents view such a working relationship as an opportunity, traditional players (53.7%) also see FinTechs as good targets for acquisition.

FinTechs are, however, also seen to pose a threat to traditional players, with 43.1% of respondents assessing that threat as ‘significant’. The development of FinTechs has also resulted in an impetus for traditional players to innovate, with 62.7% of respondents saying that they ‘are setting the bar higher’. 22.4% of traditional financial services firm executives are convinced that FinTechs can survive on their own.

Executives’ view of customers’ experience.

One area in which FinTechs have been touted as outperforming incumbents is the customer experience. The number of executive respondents that believe financial services incumbents provide a better experience stands at 13.5% for value for money, compared to almost 53% that say that non-traditional FS players are better, while 12.2% say that they offer transparency, compared to 37.8% for non-traditional players.

Executives are particularly concerned about their ability to provide a better user experience, at just 9.5% saying they do better than job that non-traditional players, while 67.6% say that non-traditional players do better. The research finds however, that customers are not in agreement with the perception – they prefer the customer service of incumbents. The area in which traditional players are perceived, by executives, to outperform non-traditional players is security and fraud protection, at 74.3% compared to 5.4%.

Firms’ activeness in various approaches of applying innovation

When it comes to actually developing innovative new products and services in the financial services industry, traditional executives cite a number of channels that involve leveraging the potential of FinTech entrepreneurs. 60% of respondent firms says that they are entering into partnerships/collaboration with FinTechs, while 59.2% say that they are developing their own in-house capavilities. 38% of respondents are investing in FinTech, while 34.3% say that they are leveraging expertise by partnering with an education institution. Accelorators are being set up by 29.6% of respondents, while 18.6% are using acquisition of FinTech firm(s).

Executives’ confidence level in their strategy to address FinTech challenges

In terms of respondents’ confidence that the strategy employed is likely to address the challenges that FinTech pose, 44% say that their confidence is high, 43% say that they have medium confidence, while 13% has low confidence.

The report notes however, that while respondents are confident about their ability to deal with the innovations developed by FinTechs, few of tradition players themselves feel that they are well positioned to themselves develop innovation within their sector; 2.8% say they have achieved the ideal of embedding innovation into their cultures, and only 9.7% say they are proactively pushing innovation.

Factors hold back traditional firms while implementing innovative and FinTech capabilities

The research also sought to identify what factors are holding traditional firms back from implementing innovations and leveraging FinTech capabilities. Top of the list, as cited by 40.3% of respondents, is a ‘lack of conducive culture for innovation’, followed by ‘budgetary constraints’, as cited by 37.3% of respondents. 29.9% of traditional financial services firms say that they face considerable structural conditions focusing on business as usual and other strategic priorities, while 28.4% say that their current legacy systems are too inflexible to integrate innovations and too costly to upgrade.

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