The overwhelming majority of global banks and traditional financial services firms believe part of their business is at risk of being lost to standalone Fintech challengers, according to a PwC report released today.
The report assessed the rise of new technologies in financial services and their impact on the sector, and found that 83 per cent of traditional financial services firms believe part of their business is at risk from a Fintech disrupter, reaching 95 per cent in the case of banks.
The report, Blurred Lines: How Fintech is Shaping Financial Services, incorporates the responses of 544 CEOs, Heads of Innovation, CIOs and digital and tech transformation leaders across the financial services industry in 46 countries.
Incumbents believe nearly a quarter (23 per cent) of their business could be at risk due to the emergence of Fintech, with Fintech companies themselves anticipating they could capture one-third of the incumbents’ business.
According to PwC’s Asia Fintech leader, John Shipman, the results demonstrate that the sector has only recently tuned in to the Fintech challenge, and hasn’t yet worked out how to respond.
“The boundaries between traditional financial organisations, technology companies and telecommunications firms are being smashed,” Mr Shipman said.
“What we are seeing now is a dawning awareness of the challenges and opportunities that Fintech presents, and established players are now falling over themselves to get into the game. We estimate this will translate into a cumulative global investment in the next 3-5 years of around USD $150 billion.”
Banking and payments feeling most heat from Fintech
Two-thirds of financial services companies ranked pressure on profit margins as the top Fintech-related threat, followed by loss of market share (59 per cent).
In terms of sub-sectors, respondents from the funds transfer and payments industry anticipate that within the next five years, they could lose up to 28 per cent of their market share to Fintechs, while bankers estimate they are likely to lose 24 per cent. This compares to around 22 per cent of asset and wealth managers and 21 per cent of insurers.
According to Shipman, the Australian sector won’t be immune from this change.
“The Australian financial services industry, particularly on the banking side, has historically never really come under significant pressure from new or overseas market entrants,” he said.
“However the emergence of Fintech as a force will change all that – the key question will be whether the Australian sector embraces the change or tries to stymie it. Fortunately it looks to be the former, with 2016 set to be the year of the pilot for Fintech with established firms, ahead of operational rollouts from 2017 onwards.”
Blockchain untapped and underestimated
Blockchain, a distributed ledger technology, represents the next evolutionary jump in business process optimisation technology. Yet it ranks low on the agendas of participants.
While more than half of respondents (56 per cent) recognise its importance, 57 per cent say they are unsure or unlikely to respond to this trend.
“Companies in the sector that want to remain world class will need make technologies like blockchain ‘business as usual,’ and quickly,” Mr Shipman said. “The current lack of understanding of blockchain technology does pose a risk to existing business models – the winners will be the ones that take the time to understand the technology and the opportunity it provides.”
Partnerships pave the way but more investment needed
PwC’s survey shows the most widespread form of collaboration with Fintech companies is joint partnerships (32 per cent), indicating financial services firms might not be fully committed to direct investment yet.
Asked what challenges they face in dealing with Fintech companies, 53 per cent of incumbents cited IT security, regulatory uncertainty (49 per cent) and differences in business models (40 per cent).
In the case of Fintech companies, differences in management and culture (54 per cent), operational processes (47 per cent) and regulatory uncertainty (43 per cent) were deemed the top three challenges when dealing with established financial services firms.
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