Financial technology (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. Financial institutions and fintech companies are moving closer together and redrawing the lines that separate them. Financial institutions have begun to look inward, driving internal innovation through partnerships with fintech companies, innovations, and technological developments.
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The insights here are based on the responses of more than 1,300 senior financial services and fintech executives from 71 different countries who participated in PwC’s Global FinTech Survey. We complemented the study with our own insights and analysis into how fintech and financial services are moving closer together and how financial services is innovating in response to fintech. The report is also fuelled by proprietary research from PwC’s DeNovo, focused on fintech innovation and its impact on financial institutions.
Fintech is a driver of disruption in the market. Financial Institutions are increasingly likely to lose revenue to innovators, with 88 percent believing this already is occurring. The perceived business at risk trend has continued to rise, to 24 percent on average this year among all sectors. Incumbents are becoming more aware of the disruptive nature of fintech, shown well by the fact that, in 2017, 82 percent of North American participants believe that business is at risk, up from 69 fintech in 2016.
Insights from PwC’s DeNovo also indicate that 30 percent of consumers plan to increase usage of non-traditional financial services providers and only 39 percent plan to continue to use only traditional financial services providers.Traditional financial institutions have noted the market disruptions that are from the influence of fintech and are responding to it.
In order to counter their perception as lagging behind, 77 percent are increasing internal efforts to innovate and 56 percent have put disruption at the heart of their strategy. Boosting internal innovation will ensure that incumbents are able to appropriately respond to the market changes that are rapidly occurring. Not only are they doing this by internally innovating, but also by purchasing the services of fintech companies, with 31 percent of incumbents doing so, in comparison with 22 percent last year Fintech companies create an ecosystem that fosters the collection of vast amounts of data and builds trusted relationships with clientele.
Financial institutions have realised the potential of this and are increasingly partnering with fintech companies. Currently, 45 percent of participants are partnering with fintech companies, an increase from 32 percent last year. A further 82 percent have indicated that they are planning to do so in the next three to five years. These partnerships, although challenging, allow them to accelerate their plans for innovation.To be able to provide a new digital experience for their customers, incumbents are focusing on integrating their legacy systems with data analytics and mobile technologies. Once these systems are able to keep pace with the more agile systems of fintech companies, traditional financial institutions will be able to invest in the technological advances that larger fintech companies are already beginning to focus on – such as artificial intelligence, blockchain and biometrics and identity management. 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.
There has been an increased familiarity with blockchain, coupled with an expectation for more financial institutions to adopt it as part of their production system or process in the next three to five years. This will have a notable effect on the payments/trade infrastructures, digital identity management and post-trade settlement because these areas present the most relevant business use cases of blockchain in the financial services sector. Incumbents see regulations as barriers to change and a source of uncertainty. The main regulatory barrier to innovation, as indicated by 54 percent of participants, are data storage, privacy and protection. They further identified digital identity authentication and anti money laundering/know your customer issues as the second and third most concerning barriers, at 50 percent and 48 percent respectively. But innovators are bringing new solutions to the market to quickly address regulatory requirements and ensure compliance with regulatory developments. In some cases, regulations also act as a catalyst in the market, forcing incumbents into action. For example, the Payment Services Directive, which will give rise to open banking across Europe, or the General Data Protection Regulations, which will change data protection and portability laws.
Prioritisation in the innovation process is key for financial institutions. Figuring out the needs in the market first, and investing selectively to learn, will create opportunities for financial services companies.
By adopting one of the many solutions brought by innovators, financial institutions can gain incremental returns and find a way to expand new products and services and reach new customers. Adding option-creating investments, including transformational growth opportunities, to the portfolio helps financial institutions optimise their innovation process. Scaling back to focus on selective investments will pay out and may eventually lead to the expected annual return on investment of 20 percent. PwC