FinTech presents the financial services with both risks and opportunities. The risks include the loss of significant business to standalone FinTech players that are able to leverage innovation while exceeding customer expectations, while the opportunities include disrupting their own sector through customer centric propositions that lower costs, create additional revenues and improves customer retention. New research highlights that for financial institutions seeking to gain access to the FinTech players, partnerships are the most popular; although up to 25% of financial services are yet to engage at all.
The development in, and the proliferation of, smartphones, social media and digital marketplaces has, in recent years, begun to transform the way in which consumers engage with a range of services, from the purchase of consumer goods to the procurement of financial services. Although the financial services (FS) sector has experienced a degree of change in recent years, the constant penetration of technology-driven applications in nearly every segment of FS is something new. At the intersection of finance and technology lies FinTech – a phenomenon that has been accelerating the potential pace of change and may come to reshape the industry’s status quo. The industry last year saw investment hit $19 billion and is, according to PwC, expected to see, within the next 3-5 years, cumulative investment globally well exceed $150 billion.
In a new report titled ‘Blurred lines: How FinTech is shaping Financial Services’, PwC explores the effect that FinTech players are having on the financial services industry. The research is based on a global survey of the financial services industry in 46 countries, and includes 544 respondents, principally Chief Executive Officers (CEOs), Heads of Innovation, Chief Information Officers (CIOs) and top-tier managers involved in digital and technological transformation. Additionally, the firm drew on a range of resources from its Strategy& DeNovo network, which leverages more than 40,000 public and proprietary data sources.
The respondents expect the greatest level of disruption from FinTech propositions to occur within ‘consumer banking’ and ‘fund transfer & payments’, as cited by 80% and 60% of respondents respectively. Around 40% expect the 'investment & wealth management' segment to be affected, while 33% expect SME banking – largely due to alternative finance platforms (valued at £3.2 billion in the UK alone) – to be affected. The areas in which the propositions of FinTech competition are the least likely to be observed are ‘reinsurance’, at less than 5%, ‘investment banking’, at around 10% and ‘fund operations’, also at around 10%.
The respondents were also asked to consider what % of their respective business is at risk from standalone FinTech players in the coming five year period. The largest risks are perceived to be in the 'fund transfer & payments' segment, with respondents concerned about losing up to 28% of their business on average. Banks are worried about around 24% of their business being picked up by a standalone FinTech proposition, while insurance companies worry about around 21% of their business.
The specific areas of concern that FinTech players pose on incumbunt businesses within the FS industry relate to a number of key business success indicators, including a loss of market share (59% of respondents) and pressure on margins (67%). Additional concerns include an increase in customer churn, cited by 53% of respondents.
The FinTech benefit
While many of the respondents cited risks to their respective market segment from the rise of FinTech within the industry, not every aspect of the possible rise of FinTech need be bad news for incumbents. 73% of respondents cite cost reduction as a possible opportunity from the technology, as innovation and technology overcome industry bottlenecks. Improving customer retention comes in at 57% (75% of respondents cite that FinTech propositions meet changing customer needs with new offerings while 42% believe it enhance interactions and build trusted relationships). FinTech can also create additional revenues, as cited as an opportunity by 56% of respondents.
As the FinTech industry continues to rise, with a number of global hubs materialising as well as considerable funding being poured into the industry, different financial industry respondents are reacting in different ways. For instance, 32% of respondents say that they are ‘engaging in joint partnerships with FinTech companies’, while 22% ‘buy and sell services to FinTech Companies’. 9% are ‘acquiring FinTech companies’, while 11% says that they are ‘launching our own FinTech subsidiaries’. A good number (25%), however, ‘do not deal with FinTech’.
Manoj Kashyap, PwC Global Financial Services FinTech Leader concludes: “Given how fast technology is developing, incumbents cannot afford to ignore FinTech. Nevertheless, our survey has shown that a non-negligible 25% of firms do not deal with FinTech companies at all. With the pace of change now occurring at increasingly faster intervals, no financial services business can rest on its laurels.”