Top 10 technology forces that will shape financial services in 2020

03 October 2016

Ciaran Kelly, partner at PwC in Ireland, analyses the findings of a report on the real-world implications of FinTech for financial services firms and the areas these firms should prioritise to take advantage of the changing ecosystem.

The financial services (FS) industry has seen some dramatic technology-led changes over the past few years and this trend is set to accelerate. While FinTech start-ups are encroaching upon established markets, many executives look to their IT departments to improve efficiency, reduce costs and facilitate innovation. At the same time, IT departments are also trying to balance the costs associated with supporting many legacy systems, some of which are more than 30 years old.

PwC’s new report, ‘Financial Services Technology 2020 and Beyond: Embracing disruption’ captures the real-world implications of ten technological advances on the industry and those who must supervise and tackle them.

Those at the heart of financial institutions know there is no easy way to embrace this unprecedented disruption. Many organisations are now forming the view that the public cloud is safer and more reliable than on-premises solutions. Soon, Blockchain may prove to have the same impact on the future of financial services as the Internet had on many sectors such as media & entertainment, telecommunications, travel, retail etc. You get the feeling that it’s only a little while before banking operations centres are staffed by sophisticated robots, taking over manual tasks from human tellers. 

Update your IT operating model

Financial services leaders need to be able to quickly innovate, keeping pace with technologies, keeping ahead of competitors and respond to markets change. At the same time they need the skilled resources to do so.

Ten technology-driven forces

From that perspective, the PwC report lists the ten most important technology-driven forces that will shape competition in the financial services industry by 2020 for financial institutions:

  • FinTech will drive the new business model
  • The sharing economy will be embedded in every part of the financial system bringing together those who have excess capital with those that need financing, leading to the disintermediation of traditional lending models
  • Blockchain will shake things up
  • Digital becomes mainstream
  • 'Customer intelligence' will be the most important predictor of revenue growth and profitability
  • Advances in robotics and Artificial Intelligence (AI) will start a wave of 're-shoring' and localisation
  • The public cloud will become the dominant infrastructure model
  • Cyber-security will be one of the top risks facing financial institutions
  • Asia will emerge as a key centre of technology-drive innovation
  • Regulators will turn to technology.

The financial services industry is now at a cross-roads and how well you adjust to technology developments and innovations will define the leaders in 2020 and beyond. The six priorities from which financial services organisations can benefit are:

  • Update your IT operating model to get ready for the ‘new normal’
  • Slash costs by simplifying legacy systems, taking Software as a Service (SaaS) beyond the cloud, and adopting robotics/AI
  • Build the technology capabilities to get more intelligence about your customers’ needs
  • Prepare your architecture to connect to anything, anywhere
  • You can’t pay enough attention to cyber-security
  • Make sure you have access to the necessary talent and skills to execute and win.

Prepare your architecture to connect to anything

Established financial institutions need to find a solution for retiring legacy systems while at the same time embracing a new innovative and agile approach to exploiting the benefits that new technologies present. While it may appear that new entrants into this sector hold all the cards, they may be disadvantaged in terms of understanding the FS ecosystem that takes into account credit risk, regulatory risk, market risk and customer centric relationships. The winners on both sides may come from those who are most able to collaborate with one-another. In conclusion, FS institutions need to start thinking quickly about refreshing their strategy for 2020 and beyond.

Another recent report by PwC on FinTech found that financial technology players are becoming a growing concern for incumbent banks, at the same time, the threat looming around the corner is inciting banks to change, include ramping-up innovation and establishing collaborations.


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The business and operating models of digital-only banks

04 April 2019

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.