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Banks race to blockchain to fend off fintech threat

Collaboration and adoption of blockchain and Bitcoin technologies top the banking agenda.

By James Nunns

Fintech start-ups are continuing to prove themselves as a significant threat to banks despite a fall in investment.

The threat posed by fintechs isn’t new, they have been posing a threat for a number of years thanks to their ability to quickly adopt new technologies and deliver digital services that appeal to a younger generation of customers.

According to ‘The Pulse of Fintech’ quarterly report by KPMG and CB Insights, the venture capital investment into fintech is on pace to exceed 2015 results, despite a 49% drop in Q2.

Overall global investment in fintech companies across both venture-backed and non-venture-backed companies totalled $9.4bn in Q2 2016. This figure was boosted by Ant Financial’s $4.5bn financing and VC-backed fintech companies raising $2.5bn across 195 deals, a 12% drop in deal volume compared to Q1 2016, the report said.

This drop could suggest the start of a fall in interest when it comes to the fintech market, the report says that the industry is experiencing a plateau after its explosion in 2015 which lead to high VC funding and high valuations.

The report said: “In 2016, concerns about those high valuations, the lack of significant IPO exits and macro-economic factors seem to have led investors to be more cautious. Over the first 2 quarters of the year, VC investors focused on more experienced companies with proven technologies or business models.”

Despite this area of concern there is still a huge threat posed by fintechs to the established banks, which is why more moves are being made to collaborate.

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Many large organisations have been investing in internal innovation labs in order to collaborate rather than compete. The move helps the established banks to respond to challenges and test technologies.

An example of this can be seen in collaborative partnerships between the likes of Santander with SigFig, a robo-adviser wealth management company.

“Over the next several quarters, it is likely that a number of these collaborative activities will bear fruit,” the report said.

Despite this heightened collaborative approach, many are struggling with technologies such as a blockchain.

The potential for blockchain is that it could increase the speed and reduce the cost of certain banking activities, such as settlement and clearing, and smart contracts.

According to a report from Juniper Research, VC investment into blockchain technologies and Bitcoin companies totalled $290 million in the first six months of the year, with more than 30 start-ups receiving funding in that time.

The research, ‘The Future of Blockchain: Bitcoin, Remittance, ID Verification, & Smart Contracts 2016-2021’ found that there has been an increasing diversification of blockchain deployments, with applications ranging from identity to asset management.

The distributed ledger technology is being looked at in a number of different ways and the banking sector is being particularly proactive. Several banks have already adopted Ripple blockchain protocols and others are piloting competing solutions, the report said.

What appears to be happening is that banks have found a style of technology that they feel can be adopted and will help them to fend off competition from fintechs.

By combining collaboration with fintechs and the adoption of certain technologies, banks are able to keep an eye on those that may pose the greatest threat while steadily increasing their own use of innovative technology.  

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