Integral and agile strategy is key for success of FinTech investments

07 November 2017 10 min. read

46% of financial services leaders have a FinTech strategy in place, with 57% of financial institutions believing it is a key priority. With FinTech firms increasingly influential in the financial services space, collaboration could be essential to the prosperity of even key industry players.

Financial Technology companies (FinTechs) have long been touted as a major force for the future of financial services. Increasingly, this has led to even the most established names in finance and banking investing in digital technology, in order to avoid being outflanked by their agile new market competitors, or even collaborating with and coopting them in order to leverage their skills directly. The Fintech sector subsequently continues to make headlines, as the possibility of disruption to one of the world’s largest industries, financial services, means the potential shift of billions in revenue. Chinese FinTech investment, for example, has boomed to more than $6.4 billion in the last year.

However, a report by Big Four professional services firm KPMG has shown that the massive growth in corporate investment in the industry is only part of the landscape. To understand how different organisations are approaching the strategic opportunities presented by FinTechs, KPMG conducted a survey of more than 160 financial institutions from 36 countries, complete with in-depth interviews with executives from leading financial institutions and their own financial services partners from around the world.

The paper shows that while financial institutions can see how FinTechs could be a substantial disruptor, there was no single unifying method for how market incumbents feel they should deal with the issue. Leading financial institutions are pursuing many different best practices – including partnering, buying, sourcing and investment strategies.

Major disruption

According to the analysis, FinTech is the biggest disruptor of our time for financial institutions. 57% of those surveyed ranked it as a top priority, ahead of growing global regulatory complexity (51%) and new business models (46%).

Top three greatest sources of disruption

Thanks to the rapid evolution of the FinTech phenomenon, financial institutions like banks, insurers and asset management firms have been forced to prepare for an uncertain future. Products, services and business models that previously worked for decades are no longer an option in the digital world. Legacy infrastructures, meanwhile, must be replaced in order to keep up with firms utilising newer, more efficient technologies. Organisations now recognise that the reinvention of their business model and processes are essential in order to thrive. The competition is also evolving, with new challengers emerging from outside the FinTech world as well. Large tech giants, retailers and other global companies are also looking for ways to provide the financial services that their customers want, as they seek to diversify into the lucrative industry.

As multiple industries have to get to grips with FinTech strategies, a diverse range of objectives has emerged. While banking, insurance and asset management all rank the enhancing of the customer experience as the prime directive of any new FinTech strategy, the customer-facing businesses of banking (75%) and insurance (86%) naturally place greater emphasis on it. 67% of respondents from asset management firms meanwhile selected customer experience as key to the adoption, with 57% also suggesting its transformative power for current capabilities was the next top priority – by far the highest of the three sample groups.

Ranking of fintech strategy objectives

While cost efficiencies, core business security and AI-based investment strategies all ranked 14% in the sector (though AI investment is significantly higher in asset management than in the other two sectors), the other major outlier is the expansion into new lines of business. 33% of asset management professionals said they would rank new business lines as a key objective for FinTech implementation, compared to banking on just 1% and insurance on 5%.

Whether it’s providing new ways to enhance the customer experience, responding to regulatory change (such as open banking), underpinning new payments or digital delivery models, making service delivery faster and more cost effective, or improving the efficiency of back-office functions — the myriad fintech solutions now available, or under development, are helping to rapidly reinvent the entire value chain of financial services. Most firms, therefore, already have a FinTech strategy in place.

Enhancing the customer experience is the most important objective of financial institutions that have or are in the process of developing FinTech strategies, however a larger chunk of that commitment resides in the sectors that are least developed in the field. 46% of all leaders surveyed said they had a strategy in place, while a further 42% had one in development – but the largest chunk of those respondents who already have solutions in place were in asset management – at 64%.

Just 43% of insurance industry heads have a FinTech strategy in place, while 50% of banking players have the same. As the FinTech market continues to mature, KPMG expect to see increased focus on mid- and back-office solutions, given the potential for efficiency savings in these areas. While customer focus usually comes first for such industries cost-cutting measures utilising AI and automation will allow financial institutions to boost their profits substantially in the long term.Emerging fintech technologies of most interest, next 3 years

With regard to the kinds of FinTech that are most interesting to firms in the long-term, most attention goes to FinTech in analytics and AI, and API. 67% of respondents ranked analytics and big data potentials of the technology as one of their top two priorities.

Application programming interface (API) was the second most popular application of FinTechs, at 55%, while robotics and AI both featured in 24% of responses each. While reports from PwCand McKinsey have both implied that huge amounts of such work could be automated in some way in the future, firms still face a multitude of barriers to implementing their new strategies.

Best practices

According to KPMG’s experts, there are several best practices that firms can adopt to navigate these challenges successfully. First, firms must take an integral approach. According to Murray Raisbeck, Global Co-Leader of Fintech, KPMG International and Partner, Insurance KPMG in the UK, “Financial institutions too often deal with fintech in a very inefficient, fragmented and tactical manner. The companies that succeed have undertaken careful architecting of their transformation strategy, including the integration of FinTech within their organisation.”

How well aligned are strategies with current fintech challenges and disruption

Secondly, firms must adopt FinTechs in a quick and agile manner, remaining flexible to change along with the rapidly shifting technology itself, and accommodating for uncertainty within their plan.

Ian Pollari, Global Co-Leader of Fintech, KPMG International and Partner and National Sector Leader, Banking, KPMG Australia, contended, “Most financial institutions are on a transformational journey — a journey likely to take multiple years and invariably requiring substantial investment to reach fruition. Given the uncertainty and speed of change, companies will need to complement this agenda with an ability to make incremental changes much more rapidly.”

Pollari added that despite the need for speed, patience is also a virtue well worth having in the adoption of FinTechs, stating, “It’s a journey that won’t be completed tomorrow. This is partly due to the transformation of core legacy infrastructure that will, by necessity, come with that change. This is why many companies have two streams of innovation — one focused on the transformation and one focused on the incremental changes that will foster improvements in the interim.”

Strategy regarding fintech developments, in the past and moving forward

As part of these trends, FS players seem to be changing how they want to work with FinTech payers in chains. This is also an invaluable best practice. ‘Fintegration’, or the process whereby traditional financial institutions partner with FinTech companies, not only means companies gain the ability to integrate innovative solutions within their own enterprises – it can also mean they co-opt what could otherwise be disruptive new competitors, avoiding a loss of market share in the long-term as a result.

But beyond this, KPMG’s report concludes that this process must extend beyond players and startups directly involved in FinTechs. Strategies must also include growing with the large technology giants as well, firms that pose a far greater threat to market share due to their size alone.

Who are financial institutions partnering with
“[Financial Services] companies that want to know more and understand the innovations coming 5 years down the road are the ones utilizing VC investments. Meanwhile, the ones that want to address pain points, make big gains and scale right now are forging partnerships. The result is a development of relationships with established tech firms — like Amazon, Google and platform businesses,” said Matthew Smith, Partner for Global Strategy Group, Insurance Sector Lead KPMG in the UK.

However, firms would also do well to remember that investing in FinTechs is no guarantee to success in itself. Over recent months, FinTech platforms including online lenders and bank technology companies have experienced elongated fund-raising cycles, missed targets, and mounting losses. At present, the pain is most acute in the online lending space, with industry heads like OnDeck, Lending Club, and CAN Capital seeing depressed stock prices or worse.

FinTechs have seen total investment coming their way from an array of sources decrease significantly, falling from $47 billion in 2015 to $25 billion last year. Venture capitalists continued to invest in the segment, however, up from $12.7 billion in 2015 to $13.6 billion in 2016, but deal volume decreased as they pulled back from funding angel/seed rounds. Corporates continue to expand their venturing footprint, as they seek to secure partnerships and technologies in a fast moving market. However, despite the future looking bright for FinTech, and those who champion its use, this suggests there are still no magic-bullet solution when it comes to sustaining a firm’s financial health.