While fintech is often considered to be an opportunity for the financial sector, six-in-ten UK financial firms believe that up to 40% of their revenue could be lost to standalone fintech firms. How are firms planning to combat this growing threat? Or is defeat a foregone conclusion? Patrick Brusnahan reports
Fintech has progressed from start-ups wanting to challenge the incumbents to a wide ecosystem of different businesses looking to expand. The problem is with garnering scale with regards to customers. This is where partnerships could greatly help, if also bringing a share of its own risks.
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According to a new report from PwC, which surveyed more than 1,300 financial service leaders worldwide, 61% of UK financial service industry leaders believe up to 40% of their revenue is at risk, compared to 51% of financial service leaders globally.
Some 88% of participants were worried that part of their business is at risk to standalone fintech companies. In addition, DeNovo’s monthly consumer survey stated that while 30% of consumers plan to increase their usage of non-traditional financial service providers, a mere 39% plan to continue using solely traditional service providers.
Perhaps to combat this, 47% of UK firms claim they plan to acquire fintech companies over the next three-to-five years. Some 81% state they plan to initiate strategic partnerships with fintechs over the same period.
However, currently UK financial services firms only dedicate 9% of their annual turnover to fintech and IT projects, below the global average of 15%.
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By GlobalDataOver a third (39%) plan to invest in cybersecurity while 77% want to invest in data analytics.
Whether this is too little too late remains to be seen, but 92% of UK incumbents believe that consumers use fintech to conduct payments, 81% say it is already used for personal finance and 72% for funds transfers.
Steve Davies, EMEA fintech leader at PwC, said: “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.
“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.”
A disruptive nature
Post-2008, the global financial crisis kickstarted a number of business-wide transformation programmes. A decade later, the results are inconsistent and there has been a lot of investment. Many are looking towards fintech to break the cycle.
In total, 56% of respondents to PwC’s survey agreed that disruption was at the heart of their strategies. By embracing disruption, financial institutions hope to respond to innovation and address customer needs.
Financial institutions will also need to disrupt their own operations and processes, which will introduce culture and mindset challenges. Overall, 77% of respondents expect to increase internal innovation efforts over the next three-to-five years.
Adopting effective growth strategies and integrating with fintech will be essential when partnering for innovation. Partnering with fintech companies is up from 32% in 2016 to 45% in 2017. However, there are large discrepancies. For example, in Europe, Italy is at 41% while Germany is at 70%.
In all countries, a large chunk of participants, 82% on average, expect to up their level of partnerships within the next three-to-five years.
This will allow incumbents to outsource part of the R&D to help bring their solutions to market quickly. Fintechs, in turn, will benefit from the large data sets that incumbents already have.
Integration will not be easy. Difference in management and culture, as well as regulatory uncertainty and legacy infrastructure difficulties are all roadblocks to true integration.
The report concluded: “The financial services industry will be unrecognisable in five years. The innovators of today will not necessarily be the innovators of tomorrow. The question then that companies need to ask themselves is: what can I do to ensure that I am not caught at the back of the pack?”
