FinTech spurring banks and payments companies into active change

26 September 2016 6 min. read

A rapidly transforming payments and funds transfer space is, through the possibilities opened by digital technologies, spurring incumbents to act. A new study finds that 87% of the sector’s incumbents believe that some part of their business is under threat from FinTech, while 28% believe that a quarter of their operations might be lost to FinTech developments. The sector is responding by starting their own FinTech subsidiaries or entering into partnerships.

In a new report, titled ‘Payments in the Wild Tech World Digitisation and changing customer expectations’, PwC explores the effect of financial technology (FinTech) players on the funds transfer & payments market. The survey for the report involves 544 financial services respondents from 46 countries, with the focus on the funds transfer & payments institutions involving 24 respondents from the sector.

Highlight from the global FinTech report

In recent years, incumbents within the payments market have begun to focus on creating a range of digital offerings to improve customer experiences. As a result, cash transactions continue to decrease while online shopping booms. Rapid digitalisation, as well as increased online commerce, has resulted in a space within the market for new propositions that fill growing, and sometimes new, needs.

FinTech companies, generally startups (venture capital investments into the industry reached $19 billion last yearor large tech firms with R&D subsidiaries, have for some time been devising propositions within the funds transfer & payments space. The survey highlights that 87% of current players in the landscape believe that some parts of their business are at risk from FinTechs, while 28% believe that as much as a quarter of their operations could be lost by 2020. 

Engaging FinTech

According to the research, the vast majority of the current incumbents within the funds transfer & payments space, see themselves as delivering customer centricity – with respondents in the sector well above that of respondents in other financial services sectors in terms of ‘fully’ and ‘very’ customer centric. Customer centricity, in so far as incumbents are able to meet expectations, is a key pillar for offsetting one of the major benefits of FinTech providers.

The study also finds that companies within the funds transfer & payments sector are much more likely to have FinTech at the heart of their strategy, with almost 50% that agree compared to 30% in other financial services sectors, while 40% somewhat agree, compared to around 25% in other sectors.

Trends within the payments industry

The research further sought to identify trends within the space of the payment industry, by comparing the likelihood to respond to a trend with the trends importance. On the top of the list are advanced tools and technology through which consumers can be protected from identity theft, fraudulent transactions and account fabrication – which is becoming an increasing headache for companies across the globe. Faster payments, with transfers between banks still taking at least a working day in most cases, comes second, while the rise of the digital wallet, to ease online shopping, comes third.

The trend with the largest cohort of FinTech players is in the development of a new generation of point of sales solutions, which is seen as the fourth most important trend for incumbents. Other major areas of FinTech activity are in the development of peer-to-peer payment solutions as well as increased value-added to merchant service solutions.

Areas most important to impact on business

Asked for what area within FinTech will have the largest impact on their business, both incumbents and FinTech players agree that ‘meeting changing customer needs with new offerings’ is the area with the biggest impact, at 90% of incumbents and 80% of FinTech players. Enabling the business with sophisticated operational capacities comes second for incumbents, at 60%, and third for FinTech companies, at around 40%. Second for FinTech companies (45%) is ‘leveraging existing data and analytics to generate deep risk insights’, which is third for incumbents at around 35%.

The areas seen as the least impactful for both FinTech and incumbent players are to ‘enhance interactions and build trusted relationships', at around 35% apiece, and ‘new approaches to underwire risk and predict losses’, at around 30% apiece.

Dealing with FinTech companies

The survey also aimed to identify how incumbents are currently dealing with FinTech companies. The research highlights a number of divergent trends between funds transfer & payments companies and all financial sector players: firstly, 95% of incumbents are dealing with FinTech in some way, compared to 75% for all other sectors, and secondly, 35% of respondent incumbents are doing so by launching their own FinTech subsidiaries, compared to around 12% for all other sectors.

Incumbents are also more likely that other financial services sectors to enter into joint partnerships, buy and/or sell services to FinTech companies or establish start-up programmes to incubate FinTech companies.

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.”

Related: UK FinTech capital of the world, but competition is heating.