Fears grow among institutions over revenue loss to fintechs

Fears grow among institutions over revenue loss to fintechs

PwC's latest global fintech survey shows that the fast evolving sector is beginning to seriously worry incumbent institutions. Kam Patel reports.

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A survey by PwC concludes that global financial incumbents could lose nearly 25% of their business to fintechs over the next 3-5 years. Nearly 90% of those polled by the accountant are worried parts of their business are already at risk to fast evolving startups.

Based on responses from over 1,300 senior financial services and fintech executives from 71 different countries, PwC’s 2017 Global Fintech Survey finds legacy industry executives most concerned about the impact fintechs are beginning to have in areas such as payments, money transfers and personal finance.

The survey reveals that in an effort to combat the threat from fintechs nearly 80% of institutions are increasing internal efforts to innovate. More than half of them now say that disruption is very much at the heart of their strategy. PwC notes that as well as focusing on in-house innovation, institutions are increasingly purchasing the services of fintech companies, with its latest survey showing 31% of incumbents doing so compared to 22% last year.

Increasingly for incumbents it is also becoming a case of “if you can’t beat them, join them” with institutions moving to partner up formally with fintech companies – more than 80% plan to do just that over the next three to five years to help accelerate their plans for innovation, according to PwC.

Drilling down to specific technologies, the survey notes that to provide a new digital experience for their customers, incumbents are focusing on integrating their legacy systems with data analytics and mobile technologies (see chart below). PwC says that once these systems are able to keep pace with the more agile systems of fintech companies, traditional institutions will be able to invest in the technological advances that larger fintech companies are already beginning to focus on such as AI, blockchain and biometrics. Such technological advances will not only create a new digital experience for the customer, but will also create increased security, more agile processes, and reduce costs, it says.

Tech areas of investment

Focus on AI and blockchain

As it stands, the survey finds that 46% of large fintech companies are investing in AI versus 30% of large financial institutions. Blockchain technology, meanwhile, is starting to move out of the innovation labs and towards commercialisation, with 77% of financial institutions surveyed expecting to adopt the technology as part of an in production system or process by 2020.

PwC believes this increased adoption of blockchain technology will have a notable effect on payments and trade infrastructure, digital identity management, and post-trade settlement as these areas present the most relevant business use cases of blockchain in the financial services sector. “With mainstream blockchain arriving soon, regulators need to prepare to ensure financial institutions can make use of the technology in an effective manner,” it adds.

The tougher post crisis regulatory environment is regarded by incumbents as a potential barrier to change and a source of uncertainty. Over half of institutional respondents to the PwC survey cite data storage, privacy and protection as the main regulatory barriers to innovation. Other major barriers cited are digital identity authentication and AML/KYC issues. Great store is therefore being set by regtech, which uses new technologies like AI, biometrics and cloud to develop innovative solutions for dealing with regulatory requirements and compliance matters.

The PwC report authors note that consumer trends too suggest fintechs will make life tougher for incumbent institutions. The accountant’s De Novo fintech intelligence platform’s latest monthly consumer survey indicates that 30% of consumers plan to increase their usage of non-traditional financial services providers and only 39% plan to continue using solely traditional service providers.

The authors conclude:  “Fintech has had a staggering effect on the market in the past year. Funding for fintech projects is moving from a venture capitalist dominated field to a more mainstream investment field while financial Institutions and fintech companies are moving closer together and redrawing the lines that separate them.”

 

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Kam Patel is a former deputy editor at Hemscott Invest and online editor, CityAM. Other previous postings include editor, MoneyAM; digital content editor, Moneyweek; and science & technology correspondent, Times Higher Education Supplement. He is a qualified investment adviser.

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