FinTechs and incumbent FS firms increasingly leveraging partnerships

10 April 2017 Consultancy.uk

The financial services landscape is becoming increasingly diverse as FinTechs develop new technologies and business models to woo customers away from incumbent financial services institutions. Both parties are, however, finding that partnerships in many instances create mutual benefit. A new report explores the key reasons behind partnerships, their frequency as well as key challenge areas faced by FinTechs and incumbents.

The development of FinTech propositions by startups continues to take place in an evolving ecosystem. The David vs. Goliath scenario in which small startup were perceived as being out to create disruptive propositions that would unseat incumbents is increasingly transforming to an arena in which startups and scaleups partner with incumbents in an alignment of respective needs, incumbents seek innovation while startups and scaleups seek market access.

In a new report from PwC, the consulting firm explores current trends in the FinTech space, focused in particular on the relationship between FinTechs and incumbent institutions. The report, titled ‘Redrawing the lines: FinTech’s growing influence on Financial Services' is based on responses from 1,308 participants at decision making level across 71 countries.

Percentage of incumbents who believe part of their business is at risk

The number of respondents that indicate that their business is at risk from the FinTech startup scene has steadily increased over the past year. In 2016 69% of respondents in North America indicated that part of their business is at risk of being lost to standalone FinTech companies within five years, this year that number had increased to 82% of respondents. In Europe the perceived threat was up slightly, from 83% of respondents last year to 89% of respondents this year, while in Asia the perceived threat increased from 80% to 88%. Only in Africa did the perceived threat decrease slightly, from 95% of respondents to 88%. Globally the perceived threat increased 5%, from 83% last year to 88% this year.

Activities incumbents believe consumers are already conducting with FinTech companies

FinTechs have already begun to establish themselves across various aspects of the B2C financial services ecosystem. Payment system are the most ubiquitous, with 84% of respondents saying that they believe their customers are already leveraging a FinTech company for the service, while 68% of respondents believe that fund transfers too are being used by their customers.

Other areas in which respondents believe FinTechs are already engaging their customers with an external proposition include personal finance (60%), personal loans (56%), traditional deposits/savings accounts (49%), insurance (38%) and wealth management (38%). The firm notes that the trend to use third party FinTechs for services is likely to increase, with a survey from DeNovo finding that 30% of consumers are considering an increase in use of FinTech propositions while 39% plan to keep to traditional providers.

Opportunities related to the rise of FinTech

In terms of the opportunities identified by incumbents from entering into partnerships with FinTech, the expansion of products and services takes the number of spot across almost all regions surveyed, at around 60% of respondents in Asia, Africa, Europe, Latin America and North America. Increased customer base was highly ranked in Africa and Asia, while lower ranked in Oceania.

Respondents further note that they believe partnering with FinTechs has the potential to reduce their IT infrastructure costs, as well as allow them to respond to competition faster. The area of least improvement among respondents is leveraging existing data and analytics.

Current and expected partnerships per country

The continued increase in new FinTechs to the scene, the benefits of tapping external innovation for incumbents, as well as the increased use of innovatie offerings by consumers, means that incumbents are increasingly partnering with FinTechs, enabling them to access new technologies, talent and products and services.

The research shows that Germany is at the forefront of the trend, with 70% of incumbents already partnered with FinTech companies, while 78% are planning to increase their number of partnerships in the next three to five years. Belgium and the Netherlands too are already relatively partnered (69% and 65% respectively), and are set to ramp up their FinTech collaborations in the mid-term (81% and 85% respectively).

While some Western European countries and Australia & New Zealand are at the forefront of partnering FinTechs, South Korea, Turkey, Colombia and Japan are less engaged, at 14%, 22%, 25% and 30% respectively. The countries are, however, seeking to improve the level of partnership, at 76%, 76%, 93% and 91% respectively. The UK comes in at the middle of the pack, with 44% of incumbents partnering with FinTechs, while 81% say that they plan to enter into partnerships in the future.

Challenges for FinTech companies and incumbents

While partnerships offer access to new technologies, business models and customers, the working together of incumbents and FinTechs does not come without issue. Incumbents are particularly concerned about IT security when working in partnership, as cited by 58% of respondents, while only 28% of FinTechs have similar concerns. Regulatory uncertainty affects both incumbents and FinTechs, at 54% and 48% respectively, while differences in management and culture particularly affects FinTechs, at 55% compared to 40% of incumbent respondents.

The areas of least concern are the required financial investments, cited by 16% and 17% of FinTechs and incumbents respectively. FinTechs are slightly more concerned than incumbents about differences in knowledge/skills, at 33% and 24% respectively, as well as differences in operational processes, at 38% and 24% respectively.

Commenting on the results of the study, Steve Davies, EMEA FinTech leader at PwC, says, “There are few overnight successes and, unsurprisingly, as much perspiration as inspiration. There is a tension between the time needed for new ideas to mature and the expectations of firms seeking to collaborate with Fintech startups. Managing expectations around returns is important, particularly for firms facing significant cost pressures. Embracing Fintech is as much about different ways of working and problem solving as it is about deploying new technology.”

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