Brexit, Trump, emerging markets, inflation – in these turbulent economic times, banks have an awful lot to fear. There may be worse to come, however, with banks urged to follow the horror movie tagline of “the call is coming from inside the house.’ Lurking within financial services itself, is a dynamic segment that is gaining significant momentum and causing disruption to the traditional value chain – FinTech.
Sitting between Financial Services and Technology, hence the portmanteau, FinTech sees start-ups and new market entrants disrupt and innovate products and services which are currently provided by traditional financial services.
With considerable financial, brand and reputation clout, do big banks like Barclays and HSBC really fear the new FinTech upstarts? According to a new PwC report, the fear is very much alive.
PwC’s Redrawing the lines: FinTech’s growing influence on Financial Services reveals that 61% of UK financial services industry leaders believe they could lose as much as 40% of their revenue to standalone FinTech firms. Looking globally, this number rose to 51%.
Some FS firms are already thinking along the lines of ‘if you can’t beat them, join them’, with almost half of UK firms (47%) planning FinTech acquisitions over the next 3-5 years. A further 81% say they plan to initiate strategic partnerships with FinTechs over the same period.
“Activity in the UK ranges from partnering with FinTechs startups, financing in-house incubators, and deploying new solutions, to testing use cases in areas like blockchain,” said Steve Davies, EMEA FinTech leader at PwC.
“There are few overnight successes and, unsurprisingly, as much perspiration as inspiration. There is a tension between the time needed for new ideas to mature and the expectations of firms seeking to collaborate with FinTech startups.”
However, those looking to take on the increased price competition, loss of market share and privacy concerns which the FinTech’s will bring, are already investing in tech and innovation – though the UK isn’t as big a spender as others.
The survey found that UK financial services firms currently dedicate 9% of their annual turnover to FinTech and IT projects – well below the global average of 15%. UK firms are, however, more realistic in their expectations of return on investment (ROI) with FinTech, with respondents saying they expect an annual ROI of 13%, while firms in the rest of the world expect an average ROI of 20%.
“The financial services industry has embraced FinTech to help drive change and innovation. FinTech collaboration, and innovation more widely, is not about jumping on the latest bandwagon – it’s about finding the best, most efficient way to deliver your business strategy and ultimately better serve your customers,” said Mr Davies.
“The UK’s financial sector seems to have a more realistic understanding of the long term returns on targeted investments. Managing expectations around returns is important, particularly for firms facing significant cost pressures.”
The survey revealed product expansion, increasing customers and leveraging existing data sets as the top three FinTech opportunities cited by UK financial firms. Retaining customers in light of the rise of FinTech was named a key priority and UK firms say the main issues they need to address in order to keep hold of their customers are intuitive product designs, faster services and lower costs.
Over three quarters (77%) of UK financial services firms say they plan to invest in data analytics in the coming year and more than a third (39%) plan to invest in cyber security. The UK was found to already be ahead when it comes to blockchain, with over a third (35%) of UK financial services firms saying they are now ‘very’ or ’extremely’ familiar with the technology. The global figure was much lower at 24%.
FS organisations also believed that consumers were already a step ahead of the curve, with consumers already switching to FinTech in some areas. 92% think consumers use FinTech to conduct payments, while 81% say it is already used for personal finance and 72% for funds transfers.
Mobile is one key technology driving this consumer switch, with many firms believing that mobile is the future. 89% of UK firms expect mobile channels to grow significantly over the next five years, with 50% of UK firms planning to invest in mobile in the coming year. However this mobile push is at odds with current use of the technology, with just 22% of UK banks, insurers and asset managers saying that they currently interact with their customers using mobile applications.